As you may have heard, Medical Properties Trust (MPW +1.39%) buys and develops hospital space, then leases it out to hospital operators, collecting a tidy rent check for years thereafter -- or selling it at a profit to generate cash for more acquisitions. The real estate investment trust (REIT) is one of the healthcare sector's largest, so it's no surprise that investors are curious about how much money an investment from a decade ago might have made.
Let's do a few quick calculations to see how this business performed before examining whether it can be a good investment moving forward.
NYSE: MPW
Key Data Points
You'd have been better off investing in an index fund
An investment in Medical Properties Trust 10 years ago would have grown its total return by 95.6%, losing out to a market-tracking index fund like the SPDR S&P 500 ETF Trust, which rose by 225.2% in the same period. So, if you bought $5,000 worth of the REIT's shares, you'd be richer by roughly $9,783 when reinvesting the dividends it paid out, whereas your shares themselves would be worth a grand total of (drumroll please) $5,109 if you opted not to reinvest the dividends. The same $5,000 investment in the index ETF would be worth around $13,520 even if you spent 100% of its dividends as soon as they hit your account, making it a significantly better choice overall.
That doesn't mean that Medical Properties Trust was or is a "bad" pick for passive income, so long as you keep your expectations well grounded. After all, the S&P 500 ETF only has a forward dividend yield of roughly 1.6%, whereas Medical Properties Trust's is 8.9%. To make $500 in annual dividends from the stock, you'd only need to invest a relatively modest sum in the ballpark of $5,617, whereas with the ETF you'd be looking at a much larger investment of $31,250 to make the same amount.
Most people don't have nearly enough cash in the bank to spend that much on buying those shares of SPY all at once. Still, it's probably a good idea to accept that beating the market won't be likely with this business.
Even if you're investing for cash flow, tread with caution
There are a couple of risks that are key for investors to understand when it comes to Medical Properties Trust's ability to keep sending dividends your way. The first risk is that while over the last three years the company's trailing-12-month net income rose by 229%, driving its payout ratio down to 55.3%, its earnings growth now appears to be slowing down since its rapid increase in early 2022.
I'll get to why that slowdown is happening in a minute, but for now just recognize that it could portend trouble in the future if the deceleration continues, assuming that management aims to continue to increase the size of the dividend annually. When paired with the fact that there probably won't be a major and enduring increase in the level of demand for hospital floorspace anytime soon, the longer-term picture looks a bit more bearish.
The second risk is that the company's cash holdings of over $299.1 million won't be enough for it to buy a significant number of facilities to serve the demand that exists. While it plans to sell a trio of hospitals in 2023 for $457 million to raise some money, it also sold 11 properties in Q3 of 2022 alone. Each sale means less rental income per quarter -- and those weren't the only sales that it made in 2022 either, which is why its net income is slowing down.
Furthermore, the proceeds from the sales in 2022 were used to pay down its short-term debt, per management. Right now, its total debt load of nearly $9.5 billion isn't intimidatingly large compared to its assets, yet it will likely mean that Medical Properties Trust will face somewhat high interest rates if it decides to take out new debt. And that'll leave less money left over for paying out to shareholders.
Overall, if you're only looking for a dividend stock, Medical Properties Trust could still serve your needs, though its long-term prospects are only average. But, if you're looking for an investment in a company with some competitive advantage or some chance to benefit from being in a growth industry, look elsewhere in the healthcare industry.
