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How Safe Are Medical Properties and Its Dividend?

By David Jagielski - Jan 25, 2020 at 6:00AM

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This high-performing REIT's stock is trading around an all-time high.

Medical Properties Trust (MPW -1.03%) has been a terrific investment lately. Not only has the stock risen almost 80% in the past two years and soundly outperformed the S&P 500 and its roughly 20% returns during that time, but the company also pays a dividend currently yielding 4.6% annually. With the stock around an all-time high, investors may be wondering just how safe an investment Medical Properties is. Let's have a closer look and find out.

Is the stock due for a pullback?

Buying stocks near their 52-week highs can be unappealing to some investors, let alone buying them at their all-time highs. The markets as a whole have been very bullish over the past few years, and Medical Properties has clearly benefited from that. However, Fools know that great investments can set many all-time highs before they're done, so that's not a reason in itself to stay away.

Medical Properties is a real estate investment trust (REIT), and over the past few years it has achieved terrific growth. In 2018, funds from operations (FFO) -- the equivalent of earnings for a REIT -- rose 19% to $485 million, and they've more than quadrupled from 2014's FFO of $107 million.  

Hospital building with 'H' sign displayed.

Image source: Getty Images.

Adding properties has been key to the company's growth. In 2014, Medical Properties had just 132 locations in its portfolio, with only 15 outside of the U.S. market making up just 8.3% of its total revenue that year. In 2018, however, the REIT had more than double that with 275 properties and 92 overseas, which accounted for 14.5% of its top line. Not only has Medical Properties shown significant growth over the years, but its revenue is also more diversified as well.

The good news is that there could still be more growth for Medical Properties: In December it announced that it was acquiring 30 acute care hospital facilities in the U.K. for approximately $2 billion, further expanding its international presence.

If FFO can continue growing at such an impressive rate, there's no reason to doubt that Medical Properties' share price can continue to rise as well.

Is the dividend too high?

The average dividend yield from an S&P 500 stock is about 1.85%, and Medical Properties is far above that. But many blue-chip stocks provide investors with better dividend yields than the average S&P 500 stock, and they aren't risky dividend investments.

Instead, what's important is the strength of the company's profits and cash flow. It's particularly important for Medical Properties, which is a REIT, meaning that it has to pay out at least 90% of its taxable income as dividends. Its payout ratio will not be a modest percentage, but the key is whether its financials are strong enough to maintain the dividend payments.

In the trailing 12 months, Medical Properties' FFO has totaled $490.5 million, which is more than enough to cover the $383 million in dividends that it has paid out during that time. Its FFO payout ratio is solid at a little under 80% and suggests that the dividend is not in any trouble today.

Takeaways for investors

Medical Properties' stock may look expensive today, but given the growth it has achieved already and lined up for the future, today's prices probably won't look so steep a few years from now. And what makes the stock an even more attractive buy is its dividend. The payouts look to be in good shape, and the company has increased its dividend payments over the years, raising them by 30% from the $0.20 quarterly payments that it was paying in 2013. 

Overall, Medical Properties is a good dividend stock and can be an attractive long-term investment for income investors.

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Stocks Mentioned

Medical Properties Trust, Inc. Stock Quote
Medical Properties Trust, Inc.
MPW
$18.28 (-1.03%) $0.19

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