Healthcare REIT Medical Properties Trust (MPW -1.51%) pays a massive dividend that yields almost 16% at the stock's current share price. That's among the highest on Wall Street and a massive win for investors if the company can keep paying it.
But there's a catch: Companies set a dividend amount, and the market determines the yield via the share price. Medical Properties Trust's massive yield reflects the risk the market sees in the stock. Otherwise, investors wouldn't trade the stock for such a high yield.
So, should investors fear a dividend cut? Or is the market missing something? Here's a look at whether the dividend is safe and what it means moving forward.
Getting familiar with the business
Medical Properties Trust is a real estate investment trust (REIT), a company that acquires and rents real estate, sharing most of its taxable income with shareholders as dividends. The company is a net lease REIT, which means that the properties' tenants are responsible for most of the upkeep, such as property taxes, insurance, and maintenance.
A net lease structure typically means tenants pay less in rent because they're taking on these expenses. It also makes business more predictable for a company like Medical Properties Trust; it can sign tenants to long-term leases and capture the spread between incoming rents and its cost of capital.
Most REITs specialize in a specific real estate niche, and Medical Properties Trust's focus is healthcare facilities. The company owns 444 properties across 10 countries and 31 U.S. states. In all, its properties house beds treating roughly 44,000 patients at a time.
Can you trust the dividend?
You can see below that the market's trust in Medical Properties Trust has seeming faltered over the past year. The dividend yield has soared, especially over the past six months. REITs report their profits as funds from operations (FFO), a metric based on the business's recurring profits. Management outlined 2023 guidance during the Q4 earnings call, estimating normalized FFO per share between $1.50 and $1.65.
As a fellow Motley Fool contributor discussed, the guidance is below 2022's normalized FFO per share of $1.82, partly due to some tenants missing rent payments. You can also take 2023 guided figures and make some adjustments. For example, let's apply the adjustment for straight-line revenue, which averages rent payments over the lease term. Management has adjusted FFO for this by minus $0.50 per share each of the past two years. Applying that brings 2023's potential adjusted FFO down to between $1 and $1.15 per share.
The company's annualized dividend is $1.16 per share, which already puts the dividend payout ratio past 100%, even at the high end of guidance. That doesn't include a couple of other questionable adjustments -- stock-based compensation was $0.08 per share in 2022. That's technically not a cash expense, but it dilutes shareholders and increases the company's total dividend expense as the share count grows.
The dividend seems far more vulnerable when you look closer than just glancing at headline figures. This probably has a lot to do with the market selling shares continually lower in recent quarters.
What might happen?
But all isn't lost -- investors could easily see a dividend cut at some point, but you're still looking at a hefty yield at the current share price. Management could easily trim the dividend to fix the payout ratio, leave investors a still-sizable yield, and slowly ramp the dividend back up as some of the company's current problems with its tenants clear up.
A dividend cut doesn't sound good, but it might be the best thing for shareholders. So what should investors do? You might want to keep your expectations low if a 16% dividend yield is your benchmark for success. That juicy yield might not last. However, the stock's 60% decline over the last year makes it a long-term rebound candidate if management can fix up the company's fundamentals.
