Is Medical Properties Trust a good dividend stock? (NYSE:MPW)
Medical Properties Trust, Inc. (NYSE: MPW) has generated compelling dividend and earnings growth in the past. In recent months, its shares have come under severe pressure, causing its dividend yield to explode upwards, to almost 8%. I believe Medical Properties Trust is an attractive income choice at current valuations, although investors should keep an eye on some of the risks in Medical Properties Trust’s portfolio when investing in this healthcare REIT.
Key MPW Stock Metrics
Medical Properties Trust primarily owns hospital properties, an asset class where demand is not highly cyclical. Lease terms are long and MPW enjoys high occupancy rates throughout the economic cycle – whether the economy is good or bad, hospitals are running and people need treatment. This is why Medical Properties Trust has managed to operate very reliably in the past, and it should do the same in the future:
For more than a decade, Medical Properties Trust’s revenues have grown or remained stable. Overall, revenues grew exceptionally for much of this period, thanks to a series of acquisitions. Unlike other REIT sub-sectors such as shopping malls, hotels, etc., the Medical Properties niche has enabled the company to be a stable long-term player with strong execution during any crisis, including the pandemic and the Great Recession.
Over time, Medical Properties Trust has significantly increased its adjusted funds from operations and dividends. Adjusted funds from operations take into account a few items that are not properly reflected in GAAP funds from operations, such as straight-line rent.
In the chart above, we see overall growth in AFFOs and company-wide dividends. As the huge revenue growth the company has experienced in the past suggests, AFFO growth and total dividends paid per year have increased by hundreds of percentage points over the past decade. On a per share basis (the data on this can be seen in the second chart), the growth has not been so extreme. This can be explained by the fact that Medical Properties Trust issued new shares at a rapid pace during this period. For most companies, issuing shares and increasing the number of shares is a red flag. But in the case of REITs, the issuance of shares is predictable and is actually a positive thing when the proceeds are used accretively. Since REITs pay a large portion of their income in the form of dividends, their ability to self-finance their growth through cash flow generated by their operations is limited. When companies want to grow rapidly, they must finance their growth by issuing new shares, which is what Medical Properties Trust has done in the past and what the company will also do in the future. Since these products were invested in properties that generate attractive starting yields, this was accretive per share. Despite a high payout ratio, Medical Properties Trust has managed to grow its adjusted funds from operations by more than 50% per share over the past decade. For an income vehicle, this type of growth is very solid and can easily produce double-digit total annual returns when bought with a high enough starting dividend yield – it currently is, I believe. Let’s take a closer look at what the MPW dividend means for investors and the total returns they can expect in the future.
What should investors know about the Medical Properties Trust dividend?
Medical Properties Trust currently pays $0.29 per share per quarter, which equates to annual dividends of $1.16. This translates to a dividend yield of 7.5% for someone buying at the current stock price of $15.50. For those who bought at the bottom last week, returns reached 8%.
Medical Properties Trust is expected to earn $1.83 this year (adjusted funds from operations per share) according to Wall Street consensus. This means that the company will pay around 63% of this year’s AFFO as dividends, as long as there are no further dividend increases throughout the year. The dividend was increased earlier this year, so I think it’s a realistic assumption that we won’t see another dividend increase this year. A payout ratio of 60% to 70% isn’t too aggressive, but relatively high for most stocks. However, for a REIT, that’s not a high payout ratio at all.
In fact, many low-risk stable dividend producers in this space operate with significantly higher dividend payout ratios, such as Realty Income (O) or WP Carey (WPC), with payout ratios of 74% and 82%, respectively. By comparison, Medical Properties Trust’s dividend payout ratio in the 1960s is conservative. This should allay concerns about a potential dividend cut – based on what we know today, this is quite unlikely. Even a moderate 20% drop in earnings would not mandate a dividend cut – and based on MPW’s business model with long-term lease terms and the fact that hospitals are necessary in any economic environment, such decline in profits is rather unlikely. So I think Medical Properties Trust’s dividend is quite safe, which makes it attractive because of the supply of high-yielding stocks right now. This is also underlined by the fact that MPW’s dividend yield has rarely been so high in the past:
During the Great Recession, Medical Properties Trust’s dividend yield hit double digits, but since then most stocks have offered a dividend yield of around 6%. Equities only briefly offered returns of over 7.5% in early 2016 and during the interest rate selloff in early 2018. Even during the COVID selloff in early 2020, yield of MPW’s dividend has not exceeded its current level. From a yield perspective, therefore, this could be a historically good time to buy shares of this dividend-growing stock.
Dividend growth has averaged 4% over the past 3, 5 and 10 years. We can therefore say that Medical Properties Trust is a relatively predictable income growth stock, as there have been no major ups and downs in the company’s dividend growth rate. It should be noted, however, that dividend growth has actually accelerated slightly, from 3.6% over the past decade to 4.4% over the past three years. But even if dividend growth were to return to the 3% to 4% rate in the future, investors could reasonably expect total returns in the 11% range when we take into account the dividend yield of 7 .5%. In fact, even if MPW’s dividend growth slows to just 2.5% per year, the REIT could generate annual returns of 10% before factoring in the potential tailwinds of multiple expansion. If dividend growth continues at the more recent rate of 4% to 5%, MPW could generate annual returns of 12% in the future. Neither of these scenarios is bearish, and the 12% annual return scenario is actually very attractive, I believe. Even 8-10% annual returns from a stable, recession-proof business would be compelling from a risk and reward perspective.
Is MPW stock a buy, sell or hold?
Management has proven its ability to guide the company successfully with a clear long-term vision. Massive shareholder value has been created by management’s focus on growth despite the company regularly issuing new shares. Investors enjoy predictable dividend growth and when buying at a high starting yield, total returns are quite attractive.
With a large portion of contracts indexed to inflation, Medical Properties Trust should see its rental income increase significantly in the current environment. If inflation stays elevated for longer, as some investors and analysts believe, MPW is well protected. In fact, if its debt swells as rental proceeds and the underlying value of its properties increase, MPW could be a winner in a high-inflation world.
Right now, the shares are trading at just 8.4x FFO forward, which is a pretty low valuation. Even in a bearish scenario of zero growth, the current valuation would be far from excessive. Based on historical growth patterns and the high starting yield of 7.5%, I think annual returns of 8% to 10% can be expected, even with fairly conservative assumptions. In a more bullish scenario, returns of 12% or even more are also possible. Overall, I believe Medical Properties Trust is an attractive value at current prices. This income choice looks good for retirees and other investors interested in earning a resilient and still fairly high income yield.