Searching for stocks with ultra-high yields is like walking through a minefield. Generally, most stocks are just ticking time bombs and are on the verge of cutting their dividend. But, sometimes, you can find a misunderstood stock and score an excellent investment.
One of the higher-paying dividend stocks right now is Medical Properties Trust (MPW -1.10%), a real estate investment trust (REIT) that invests in healthcare facilities. With a 9.4% dividend yield, is this stock a landmine waiting for unsuspecting investors? Or is there a once-in-a-lifetime investment opportunity here? Let's find out.
Bad credit ratings are weighing on the stock
Many hospitals don't own their buildings; companies like Medical Properties Trust do. This makes tenants unlikely to leave because hospitals are expensive and time-consuming to construct. With nearly 530 hospitals in its portfolio, Medical Properties has a significant reach in an essential part of the medical industry.
So why is Medical Properties stock down nearly 50% from the beginning of 2022, given how vital it is? It all has to deal with its credit.
Many investors are worried about Medical Properties' ability to pay its debts. One of the top credit raters, Moody's, has a long-term rating of Ba1 on its credit, the highest non-investment-grade rating a business can have. Its outlook on the company's credit is stable, so the analysts there don't think it's getting any worse.
S&P Global, on the other hand, doesn't see it the same way. Its BB+ rating is on watch with negative implications, meaning it is considering a downgrade.
Regardless, the Ba1 and BB+ ratings mean the company's bonds are considered "junk," and that there is a higher-than-average chance the company would default on repaying them. As a result, the yield on these bonds is high because investors need more incentive to own them.
In a rising-interest-rate environment, the premium a company like Medical Properties has to pay on its debt is increased, so any new debt the company takes on will not be cheap in terms of the interest rates it must pay.
Just because a company has a low credit rating doesn't mean it's doomed. However, these narratives can have a significant impact on its stock price. So is this a buying opportunity for investors?
Financially, Medical Properties is currently in a solid state
In the third quarter, Medical Properties' revenue fell 10%, thanks to lower straight-line rent, or rent that isn't subject to adjustments or concessions. This item fell because Medical Properties sold $360 million in assets that were generating revenue through straight-line rent.
The company's normalized funds from operation (NFFO, a metric REITs use to convey cash flows better) was slightly up to $0.45 per share, compared to $0.44 last year. Additionally, Medical Properties raised the full-year NFFO outlook, showing the company is growing. Utilizing adjusted FFO (which subtracts straight-line rent and adds stock-based compensation), the company pays about 81% of its AFFO in dividends.
So the company has the cash flow to maintain its dividend.
The most significant sticking point for investors (and credit rating agencies) is its Steward properties in Utah. With an extensive restructuring process in place, Medical Properties expected this segment to return to sustainable positive free cash flow in the fourth quarter. If it can turn around this division, the company will have stabilized its worst-performing division and crushed one of the bear case's most prominent points.
It's rare to stumble across a stock that might have a sustainable ultra-high-yield, but Medical Properties may fit that description. Regardless, you must be careful with these types of companies because something could change at a moment's notice to change the investment thesis. All eyes should be on Medical Properties Q4 report to see if the Steward properties in Utah stabilize. If it does, I'd expect the stock to spike, making its dividend yield not seem so unrealistic but also giving investor reassurance that the company isn't going bankrupt.
Still, if the company has to issue new debt, the higher interest rates could crush the business's growth plans because its low credit rating will require the company to pay a higher-than-average rate on any bonds it issues. So if you're still interested in the stock, it might be wise to take a small position in Medical Properties instead of going all in, as the company's future is far from certain.
