Medical Properties Trust (MPW -1.10%) hasn't been a good investment over the years. Its valuation has been declining, and investors have been incurring losses. It hasn't gotten much better this year as the real estate investment trust (REIT) also slashed its dividend due to its struggling financials. But there's a contrarian case to be made that perhaps the worst is over now that it has deployed a strategy to reduce spending and improve its financials.
Here's a look at the bullish and bearish cases for Medical Properties Trust stock, and whether it's an investment worth adding to your portfolio today.
The bullish cash
What makes Medical Properties Trust stock an appealing investment is that it is a REIT that offers a high yield and focuses on the healthcare industry, which should normally be a relatively stable area of the economy. The pandemic disrupted that in a big way. The bullish case is that now, with a return to normal and hospitals resuming more regular day-to-day operations, a REIT such as Medical Properties Trust becomes a safer buy than it has been in recent years.
Plus, a lot of the bad news is out of the way already. Medical Properties Trust cut its dividend, nearly in half, in order to address the elephant in the room, which was that its dividend simply wasn't sustainable. Even today, at over 12%, the yield is extremely high. But this year, Medical Properties forecasts that its normalized funds from operations per share will be within a range of $1.56 to $1.58, which is far higher than what its dividend will cost over the course of a full year -- $0.60 per share.
Investors have become so bearish on the stock that it's arguably become a deep value buy, trading at less than 7 times earnings. The average healthcare stock trades at a multiple of 27. Medical Properties' low valuation, high dividend, and a return to normal in the healthcare industry highlight why investors may be feeling bullish on the stock these days.
The bearish case
The big concerns surrounding Medical Properties Trust stock today revolve around what may happen in the future. A dividend cut is a sign that the business isn't optimistic that it can maintain its current payout, and that it isn't expecting a big improvement in its financials anytime soon.
While the current dividend appears manageable this year, long-term investors will want some assurances about the bigger picture, and that's more of a wildcard. Medical Properties has had problems with one of its largest tenants, Prospect Medical, which struggled to pay rent earlier this year.
That's the kinds of problem REIT investors don't want to hear about. What complicates the matter is that while Medical Properties may say that its tenants are doing OK, their financials aren't publicly known; it can be impossible to tell just how good a shape a business is in and whether it is truly out of the woods or not.
Medical Properties is also looking at the sale of assets to add more liquidity. That's not a good sign, either. The REIT expects to add $2 billion in liquidity within the next three to four quarters, which should go a long way in providing stability for the business. But potentially selling assets which could generate income for the business in the long run is another troubling sign for REIT investors to consider.
Often, it's what management isn't saying that may be the most important for investors. Given Medical Properties' actions, including cutting its dividend and seeking out more liquidity, investors can gauge that perhaps the outlook for the business isn't all that rosy, and that a reduction to the payout won't solve all that ails the struggling REIT.
Medical Properties isn't a suitable dividend stock
If you're looking for a safe dividend stock that you don't have to worry about, Medical Properties Trust isn't it. Although the REIT should be on a safer path forward given better macroeconomic conditions in the healthcare industry and a lower payout, investors are better off having some skepticism. When it comes to dividend payments, a solid track record is important, and Medical Properties just doesn't have that.
The company is definitely in a better position than it was just a year ago, but that unfortunately may not be enough of a reason to invest in the stock. If you're OK with the risk that comes with the REIT and are comfortable keeping close tabs on it, the dividend stock could make for a good contrarian investment. Most income investors, however, are better off passing on the stock for now.
