Confidence in medical properties (NYSE: MPW) is a risky stock to own — there’s no doubt about it. Anyone who follows the company closely knows it’s had a rough ride in recent years, particularly with its troubled tenant, Steward Health. And the real estate investment trust (REIT) had to cut its dividend payments last year to give itself some breathing room.
However, some investors still think this is a stock worth taking a chance on. After all, if there has been a dividend cut, already happened, and if the bad news with Steward Health comes to a head, then these negative factors may already be priced into the current valuation of the stock. And if the current dividend is sustainable, it could be a bargain, as the yield remains incredibly high at around 14%.
Is Medical Properties Trust a stock worth investing in right now, or should investors simply stay away from this troubled investment?
Is Medical Properties’ dividend really safe?
On May 9, Medical Properties reported results for the first three months of 2024. And while the REIT posted a loss, normalized funds from operations (FFO) was a positive $0.24 per share. FFO is an important metric for REITs because it strips out impairment charges and one-time gains and losses. It can be a better indicator of how well the company is able to pay its dividend.
Investors can point to that fairly strong FFO number as evidence that the company can afford its $0.15 quarterly dividend. But the problem is, the company is in the midst of a turbulent time. Medical Properties has been selling assets to shore up its financial position and inject more liquidity into its operations. Through the first five months of the year, the company says it raised $2.4 billion in liquidity (above its $2 billion target) through asset sales.
The problem is that as it sells its stake in hospitals, it shrinks the size of its portfolio, which means fewer tenants will be paying rent. And with Steward Health still in the midst of bankruptcy proceedings, the biggest uncertainty still lies in what happens to what is arguably its most important tenant and its 31 hospitals. In a year or two, Medical Properties’ financials could look very different. While the latest reported FFO numbers may indicate that the dividend is sustainable now, that may not be the case in the future.
Further losses could wipe out dividend income
You can potentially generate a lot of dividend income by investing in Medical Properties Trust. For example, to collect $1,000, you might have to invest about $8,000 in the stock. And if the stock falls and you buy it at a lower price, you might have to invest even less.
But therein lies the danger: Medical Properties is a horrible investment to own over the years (it’s down about 80% in just three years), and it’s not getting any better right now. If you invest $8,000 in the stock and the REIT continues to pay dividends all year, yes, you’ve earned about $1,000 in dividends. But if the stock drops by just 13% in that time, those losses would wipe out that dividend income.
And depending on how things play out with Steward, there’s a possibility that Medical Properties could cut its dividend again, or even suspend it altogether if there’s too much uncertainty. That could not only jeopardize the amount of dividend you could collect, but it could also result in further stock losses.
Medical properties are not worth gambling
If you buy shares of Medical Properties Trust today, it’s hard not to consider it a gamble. Given all the unanswered questions about the REIT, it’s impossible to tell if this is a safe investment to hold in your portfolio. It’s not an investment I would feel comfortable holding given all that risk.
If your priority is to collect dividend income, you may be better off looking at other, safer dividend stocks to own. Medical Properties has a lot of potential to scale if it can ultimately emerge from all of this as a better company, but that’s a big “if” at this point. I see the stock as a contrarian investment that might be suitable for those with a high appetite for risk, but it probably won’t be a good option for risk-averse dividend investors.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Is Medical Properties Trust’s High Yield Dividend Worth the Risk? was originally published by The Motley Fool
