It's getting harder to find an attractive dividend yield in the current environment. Even traditionally higher-yielding investments like real estate investment trusts (REITs) are trading at lower yields. Currently, that sector yields around 3%, while the average stock in the S&P 500 is near 1.3%.
That makes Medical Properties Trust's (MPW +2.28%) dividend stand out in the current low-yield environment. At 5.4%, it's well above average. It suggests income investors have completely overlooked the company. That's a shame, because it has an excellent dividend track record and growth prospects.
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A healthy payout
Medical Properties Trust is a healthcare REIT that focuses on owning hospitals. It typically buys these properties from healthcare systems and leases them back under triple-net agreements where the tenant is responsible for maintenance, building insurance, and real estate taxes. These leases generate very stable cash flow for Medical Properties Trust.
Meanwhile, the company pays out a conservative amount of its income via dividends. It currently expects to produce $1.81 to $1.85 of normalized FFO per share this year. Meanwhile, it pays a $0.28 per-share quarterly dividend, or $1.12 annually. That gives it a 61% dividend payout ratio at the midpoint of its guidance range, which is conservative for a REIT. Medical Properties Trust also has a solid balance sheet, with a leverage ratio within its target range.
Those features give it the financial flexibility to continue expanding its portfolio, enabling it to steadily increase its dividend. Medical Properties Trust has increased its dividend in each of the last eight years, growing it at a 5% compound annual rate.
A high-quality dividend growth stock at a discounted price
Usually, one of the biggest factors contributing to a high dividend yield is that a company has a high payout ratio. However, Medical Properties Trust's payout ratio is on the lower end for REITs.
Instead, the driving factor is that it trades at a lower valuation. The market currently values it at less than 12 times its 2021 FFO estimate. For comparison's sake, the average healthcare REIT sells for more than 17 times its FFO.
Typically, the market pays a premium for growth, suggesting that Medical Properties Trust is growing at a below-average rate. However, that's not the case. The company invested nearly $3.6 billion in expanding its hospital portfolio last year. That helped grow its normalized FFO per share by 21%. This year, it has continued expanding, investing more than $3.6 billion in additional hospital real estate transactions. These deals helped grow its normalized FFO per share by 13% year over year in the second quarter.
Medical Properties Trust has grown into the second-largest nongovernmental hospital owner in the world. However, its $21.4 billion of assets is a small fraction of the global hospital market. In the U.S. alone, there are more than 6,000 hospitals worth over $1 trillion. Meanwhile, it's still in the early days of its overseas expansion. In addition, the company entered the behavioral health market this year, which it estimates at a $260 billion opportunity in the U.S. with additional expansion potential overseas.
The only thing that could slow it down is access to capital. Because the market undervalues its stock, it needs to be careful when issuing shares to fund deals, so it doesn't dilute existing investors too much. Meanwhile, it doesn't have an investment-grade credit rating, which impacts its funding access, though it can still borrow cheaply. That has led it to seek out other sources of capital, including joint ventures. It recently sold eight hospitals in Massachusetts to a joint venture, valuing them at $1.78 billion. That's 48% above what it paid for the facilities in 2016, showcasing the hidden value of its portfolio. If the REIT can continue unlocking the value of its portfolio through deals like that, it should help boost its stock price. That would provide it with even more funding flexibility to continue growing.
Investors are missing out on this top-notch, high-yield dividend stock
Medical Properties Trust hasn't captured the market's attention even though it's growing fast. Because of that, it offers a high dividend yield, backed by a reasonably conservative financial profile. Those types of investment opportunities don't come around all that often, which is why dividend investors won't want to continue overlooking this REIT.
