With a high forward dividend yield of 7.4%, Medical Properties Trust (NYSE: MPW) is of natural interest to investors seeking an income stream in their portfolios. Its business model, if executed conservatively, could indeed lead to steady and long-lived returns.
But this is probably not the right stock to buy if you’re looking for dividend income. Here’s why.
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As you probably know, Medical Properties Trust a real estate investment trust (REIT) that focuses on buying and making equity investments in hospitals and clinical spaces to rent them out to hospital and healthcare companies.
The recent problems with MPT can be summarized in one chart:
MPW Total Assets (Quarterly) data by YCharts.
As you can see, its total assets, which are $15.2 billion, have fallen over the last three years as the company has been forced to sell off its properties to stay solvent relative to its debt load. It was still offloading its assets as of the third quarter.
As a result, its quarterly revenue, which was $255.8 million in Q3, also fell, as it had fewer sources of rental income. In the same period, its cash from operations (CFO) collapsed to reach $59.2 million in the third quarter. Out of necessity, its dividend was sharply cut as well.
At the heart of the company’s issues is its debt load of nearly $9.3 billion. More than $1.2 billion of that sum is due in 2025, with an additional $2.1 billion due in 2026. There is no way that its operating cash flow will be enough to cover those debts even if 100% of it is dedicated to repayment. Therefore, more properties will be sold, and the top line will shrink further.
That is not to imply that investors who buy the stock today will be safe from seeing their dividend cut. Over the trailing-12-month (TTM) period, it paid out $364.1 million in dividends. Even with the recent cut, maintaining such a consistent cash outflow over the long-term seems unlikely, especially considering the business’s need for capital for debt repayment and growth.
Some investors may point to MPT’s low valuation as evidence for the stock being worth a buy despite its grim financials.
After all, its price-to-book (P/B) multiple of just 0.5 implies that the market is valuing the stock at less than the historical cost of its tangible assets. Such a wild disconnect is often a sign of the market overreacting and dumping shares of a business, perhaps one with a run of bad luck despite sound fundamentals.
