Medical Properties Trust (MPW 2.26%) is a stock that's been tempting investors for years. Between its consistently mind-bogglingly high yield and its promise of steady growth over time, it's easy to see why one might want to think about buying a few shares.
But this stock is one of those cases where not all that glitters is gold. To see exactly what that means, let's map out what your returns would be if you'd invested $4,000 in this stock just a few years ago, in 2018.
You probably wouldn't be very happy with this investment
It's easy to see why someone might want to invest in Medical Properties Trust. It's a real estate investment trust (REIT) that owns and leases hospital and clinical floorspace to healthcare companies. Because it's a REIT, it disburses big dividends to shareholders on a regular basis, and right now its forward dividend yield is around 15.7%. That makes it quite tempting to buy for the payout alone, but its past performance is a key consideration that should give you pause.
If you bought $4,000 worth of Medical Properties Trust shares five years ago in mid-2018, they'd now be worth a grand total of roughly $2,350, after falling by 41%. At the time of your purchase, the REIT's dividend yield would have been around 7.5% -- juicy, but not so high as to raise any alarms about its sustainability or the company's overall health.
If you reinvested the amount of money you'd have collected from dividend payments in that time, you'd have $3,107. For reference, if you'd bought an index fund like the SPDR S&P 500 ETF Trust and reinvested the dividend, you'd have a total return of $6,650. So MPT was not exactly a star performer in that period.
What went wrong
In a nutshell, this company ran into a couple of the common-but-brutal problems that REITs tend to experience.
Its top line continued to grow over the last five years, with quarterly revenue rising by 73% to reach $350 million in Q1 of 2023. To accomplish that, MPT needed to take out debt, which it then spent on buying new properties and getting tenants to rent them. Therefore, its long-term debt burgeoned, and it now totals more than $10.4 billion.
That's a very large sum in comparison to MPT's equity, which means that lenders will be more likely to command a higher interest rate for new debt that it takes out to buy more real estate. Its decline in share price is probably at least partly a result of the market pricing in the fact that future returns from its investments will be lower as a result of paying more interest.
Of course, MPT can gradually pay down its debt load, and it's doing so. But every dollar spent on repaying debt is a dollar that can't be invested for growth or returned to investors in the form of a dividend. On that front, things haven't been going exactly as planned either.
As more of MPT's income gets eaten by rising interest payments, it has less money leftover to pass on to shareholders, and its payout ratio will continue to burgeon -- but it's already at 232%. The implication is that the company will need to disburse its cash holdings to investors directly rather than paying the dividend from its net income, as its dividend payment is currently far larger than its earnings. Such a situation can be repaired by generating more net income from rents, or by cutting the dividend. And the risk of a dividend cut is another factor that's likely scaring shareholders away from buying shares in this business.
But what should you do with this information? If you're considering a purchase of Medical Properties Trust, simply don't buy it. The risk of it slashing its payout is too high. If you're still holding on to some shares, you should probably think about selling them. There's little reason to think that divine intervention is on the way, and that's more or less what would be needed to transform this stock into an attractive purchase at the moment.
