Did you know that investing approximately $8,300 would be enough for a 12%-yielding dividend stock to generate $1,000 in annual income for your portfolio? Medical Properties Trust (MPW -1.10%) pays that high of a yield right now based on Tuesday's closing stock price, which is why it might be a tantalizing dividend stock to own. The good news is it's looking a lot safer than just a few months ago. Here's why investors can feel a bit more bullish on this beaten-down stock.
1. Will the new dividend payment remain sustainable?
Earlier this year, Medical Properties Trust drastically reduced its dividend payments. At $0.15 per quarter, the new dividend is nearly half of the $0.29 that the real estate investment trust (REIT) was previously paying investors. That's a sizable reduction. But what's important is that it makes the dividend much more sustainable moving forward.
Last month the REIT reported its third-quarter earnings. For the period ending Sept. 30, Medical Properties' normalized funds from operations (NFFO) totaled $0.38 per share -- more than double the rate of its current dividend. And over the past three quarters, it has totaled $1.22, which averages out to an NFFO of $0.41 per quarter, which is even higher. That gives the business plenty of buffer to make dividend payments, and it even gives it room for its earnings to worsen and for the dividend to still be safe. Although this isn't a guarantee that things will stay this way, the REIT's dividend does appear to much more manageable moving forward.
2. Medical Properties plans to add $2 billion in additional liquidity
An important consideration for dividend investors should always be cash flow and overall liquidity. It's one thing to be profitable and for a business to have a sustainable payout ratio, but cash flow also needs to be strong for a company to be able to pay out cash dividend payments.
On the company's earnings call last month, management stated that it was planning to add an additional $2 billion in liquidity within the next year. Medical Properties plans to do this through multiple transactions, including potential asset sales.
By bolstering its financial position, Medical Properties should be in even better shape to be able to pay its dividend. It finished last quarter with cash and cash equivalents totaling $340 million, versus less than $236 million it reported at the end of 2022.
3. Utilization rates are improving and hospitals are resuming normal operations
Medical Properties is an REIT, so its stability is inevitably going to depend on the stability of its tenants within the healthcare industry. And many of those are hospitals, which struggled when COVID hospitalizations were high and they needed extra staff to manage their operations. But now, with COVID cases down significantly and no longer disrupting hospital operations, they are in much better shape.
The REIT says that hospital utilizations rates have been improving this year, and its top tenant, Steward -- which investors were concerned about in the past -- is also looking to be in better shape. The company has been able to slash over $150 million in costs just last quarter, and a big reason for that is it doesn't need to rely on contract labor (which was needed during peak COVID levels). Over the past 16 months, Medical Properties says that Steward has been able to cut close to $600 million in annual expenses from its operations.
These are encouraging developments for Medical Properties, because if a top tenant such as Steward is doing much better, that means the REIT should also be looking safer overall.
Is Medical Properties stock a buy?
Medical Properties Trust has lost more than 50% of its value this year. Even with the significant reduction in the dividend, its yield is up to 12%. However, it has been rallying a bit now that investors appear to be more bullish on its prospects, and it wouldn't be surprising to see the yield shrink even further as that continues to happen.
There's still risk with Medical Properties' stock as concerns relating to its tenants haven't gone away entirely. And while selling assets can be a good move to free up liquidity in the short term, it could hinder its long-term growth prospects. For many investors, the best approach may be to remain on the sidelines to see if the business continues to achieve strong results before putting any serious money into this business.
But the dividend is certainly much safer than it was even just a few months ago. Between the REIT's commitment to focusing on liquidity and the dividend being much more sustainable, there's a bit less risk for investors. However, that doesn't mean it's still a safe enough investment for everyone.
If you're comfortable with the risk and are willing to keep a close eye on the stock and how the REIT is performing, Medical Properties Trust may potentially be a good dividend stock to hold in your portfolio. Otherwise, you're better off simply putting the stock in your watchlist and taking a wait-and-see approach for the time being.
