An investor's natural reaction to a stock paying a yield of 10% or more might be to avoid it. That high of a yield can make investors think a dividend cut is around the corner as payouts even in excess of 5% aren't easy to sustain and might just be too good to be true. But there are exceptions.
The current bear market has sent share prices of several quality stocks plummeting, even if the financials of those companies are still solid. If that happens to an already high-yielding stock, its yield soars even higher.
This is what's happening with Medical Properties Trust (MPW 0.96%) right now. Investors shouldn't necessarily skip over this stock and assume its dividend is unsustainable. Considering the situation, this could turn out to be a steal of a deal.
Medical Properties stock price has tanked 55% this year
Medical Properties owns more than 440 facilities in its health-focused portfolio, spanning 10 countries (the majority, 61%, are in the U.S.). The portfolio includes acute care hospitals, which make up 72% of its assets. Behavioral health facilities and inpatient rehabilitation hospitals account for another 20%.
Despite focusing on a healthcare industry that should provide long-term stability, that hasn't helped this real estate investment trust (REIT) avoid a disastrous performance in 2022. As poorly as the S&P 500 has performed this year (down 23%), Medical Properties stock has done even worse, losing more than half its value thus far. That sharp decline means Medical Properties stock now yields a whopping 10.6%. On a $5,000 investment, that would mean $530 in annual dividend income.
Although that 10.6% yield looks impressive, the danger in these situations revolves around whether the payout is sustainable over the long run.
Investors normally turn bearish on REITs like Medical Properties because these types of businesses often carry significant debt. A couple of REIT-focused exchange-traded funds, the Vanguard Real Estate ETF and the iShares US Real Estate ETF, are both down 33% this year and have underperformed the S&P 500. And with Medical Properties paying a higher yield than most REITs, investors may have discounted the stock more as a result of its payout, which may appear to be too generous in the current market conditions.
Should investors worry about the stock?
The big risk for Medical Properties is that with more than $10 billion in debt on its books, in a rising interest-rate environment, its expenses could rise. More concerning is that the Federal Reserve is likely to continue raising interest rates as inflation remains a problem for the economy.
Medical Properties last released earnings in August, and there weren't any glaring signs of concern in that report. For the quarter ending June 30, the company's funds from operations (FFO) totaled $0.46 per share -- 59% higher than the $0.29 per share that it currently pays in quarterly dividends. FFO is what REITs rely on to gauge the strength of their dividend payment. Unlike net income, it excludes non-cash items such as depreciation and amortization. And based on FFO, the dividend doesn't look to be in danger.
The REIT also announced this month that it would be selling three Connecticut hospitals for $457 million, which it plans to use to pay down debt and pursue other opportunities. This and other moves Medical Properties has made recently will give it more than $1 billion in immediate liquidity. Meanwhile, over the trailing 12 months, the company has paid out $683 million in dividends.
Medical Properties' confidence in its business is evident through the recent announcement of a share buyback program that the Board authorized for up to $500 million. Share buybacks can make sense at a time when a stock is undervalued, and that appears to be the case with Medical Properties' stock, which trades at only five times its profits (the average healthcare stock trades at close to 20 times earnings).
Why now may be an optimal time to buy
Medical Properties' stock is down heavily right now. Should it rally (and it could with the support of share repurchases), then the yield could decline as a result of an improving share price. The danger for investors is waiting too long and missing this opportunity. As of now, Medical Properties' business looks safe as it has ample liquidity available and its earnings numbers still look solid.
Buying the stock now could not only allow you to earn a high yield, but also give you the opportunity to profit from a recovery in its price.