If you've spent any time lately searching for high-yield dividend stocks, you've probably come across Medical Properties Trust (MPW 0.62%) at least once. Its stock offers an eye-popping yield of 13.2% at the moment.
This real estate investment trust (REIT) specializes in leasing properties to operators of hospitals and related acute-care facilities. Medical Properties Trust generates relatively reliable cash flows because it signs long-term net leases that make its tenants responsible for all the variable costs of building ownership, such as maintenance and taxes. It also builds annual rent escalators into its leases.
Shares of Medical Properties Trust recently soared in response to its better-than-expected first-quarter earnings report. But before you add shares to your portfolio in the hopes it will continue climbing, it would be wise to reexamine what both bulls and bears have to say about it.
What the bulls will tell you about Medical Properties Trust
This is a great stock for investors nervous about the threat of a looming recession. That's because people don't need to feel financially secure to generate enormous hospital bills.
U.S. spending on healthcare grew to $4.3 trillion in 2021, and it's expected to grow at an average rate of 5.1% annually through 2030, according to the Department of Health and Human Services. Hospital expenditures reached $1.3 trillion in 2021, and that segment's growth is outpacing overall spending.
Medical Properties Trust isn't too heavily reliant on any one of its tenants. There are 54 different operators renting 444 properties spread across 31 U.S. states and nine foreign countries.
Though investors were concerned that it was going to cut its payout, the company declared a $0.29 dividend for the second quarter, in line with its previous payout. Adjusted funds from operations (a metric that REITs use as a proxy for earnings) came in at $0.30 per share -- just enough to cover the dividend.
What the bears say about this ultra-high-yield dividend stock
The great thing about net lease REITs is that they can thrive in good economic times and bad. The cash flows Medical Properties Trust receives should be identical whether its tenants are succeeding or struggling, as long as they can pay the rent.
As of April 14, 19.5% of Medical Properties Trust's shares available for trading were sold short. Heaps of intrepid traders are betting against the stock right now because at least one of its tenants is having a hard time paying all its bills.
In February, Pipeline Health System, a small operator that leases less than 1% of the REIT's total assets, emerged from bankruptcy. Part of Pipeline's settlement included the payment of outstanding rents that were already due, but a portion of upcoming payments this year will be deferred until 2024.
Prospect Medical Holdings, a large operator leasing 7.8% of Medical Properties Trust's total assets, didn't pay rent in the first quarter. Prospect has lined up new financing options that could allow it to catch up with its rent payments this year, but there are no guarantees.
Buy, sell, or hold?
Medical Properties Trust believes it can maintain its payouts. The low end of its funds from operations guidance range for 2023 is $1.50 per share, and is based on the premise that Prospect Medical doesn't pay rent again until 2024. Even the low estimate would be more than sufficient for the REIT to meet a dividend commitment set at $1.16 annually.
I bought the stock when it bottomed out last month, but I made it a very small part of a diversified portfolio. I'm calling this stock a buy now, but only for investors willing to do the same.
