Why Is Wall Street so Divided Over This 12.5%-Yielding Dividend Stock?

Some stocks are downright polarizing. They're loved by some investors and analysts but despised by others.

Medical Properties Trust (MPW -1.10%) stands out as a great example. Six of the 14 analysts who cover the stock were surveyed by LSEG in November and rate it as a buy or strong buy. Another five analysts recommend holding Medical Properties Trust. However, three analysts maintain decidedly bearish views about the stock, rating it as an underperform or a sell.

Why is Wall Street so divided over this 12.5%-yielding dividend stock? It's complicated.

What the bears on Wall Street think about Medical Properties Trust

Let's start with the thinking of the Wall Street bears. Analysts often tend to have the same mindset, as Janet Jackson expressed in her 1986 hit song, "What Have You Done for Me Lately?" And what Medical Properties Trust has done for investors lately is lose them money.

Shares of the real estate investment trust (REIT) have plunged more than 50% year to date. That's on top of a similar decline in 2022.

This huge sell-off came, in large part, because of the financial difficulties for several of Medical Properties Trust's tenants. A surge in interest rates last year didn't help matters, either.

Medical Properties Trust also slashed its dividend by nearly half in August 2023. While some investors and analysts actually welcomed the move, it nonetheless added more bad news to an already bad story.

The analysts who are bearish about Medical Properties Trust don't foresee a turnaround anytime soon. They'll likely have to see clear evidence that the healthcare REIT's financial position has improved (or perhaps a solid interest-rate cut by the Fed) before they change their tune about the stock.

Behind the bullish analysts' optimism

What do the bullish analysts see in Medical Properties Trust that the bears don't? Perhaps a light at the end of the tunnel.

These analysts would probably be quick to point out that several of the REIT's top tenants appear to be on a more solid financial footing. For example, Steward reported facility-level earnings before interest, taxes, depreciation, amortization, rent, and management fees (EBITDARM) coverage of 2.7x for the 12-month period ending June 30, 2023. Prospect resumed rent payments on its California properties.

Medical Properties Trust Senior Vice President of Operations Rosa Hooper said in the third-quarter conference call that she was "encouraged by what I've repeatedly heard from operators about the continued normalization of hospital utilization and cost trends in 2023."

The bulls would also likely note that Medical Properties Trust is taking steps to pay off some of its debt that will mature over the near term. The company plans to evaluate additional asset sales and joint-venture opportunities, as well as explore limited secured debt financing options. In total, the REIT expects to raise around $2 billion in liquidity by early in the fourth quarter of 2024.

As for the dividend, the bullish folks on Wall Street (and probably many of the bearish ones, too) know that it appears to be sustainable at the current level. Medical Properties Trust CEO Ed Aldag noted in the Q3 call that the REIT now has a payout ratio of below 60%, based on near-term adjusted funds from operations. This includes any impact from additional near-term asset sales.

Who's right?

It's understandable why an analyst would have a negative outlook for Medical Properties Trust. A healthy dose of skepticism about the REIT's prospects over the near term could be warranted. I doubt that the company will return to growth mode anytime soon.

However, I expect that Medical Properties Trust will continue to pay out dividends at the current level. More aggressive income investors could find the company's 12.5% dividend yield quite tempting.

My hunch is that the six analysts surveyed by LSEG who rate the stock as a buy or strong buy and the five analysts who recommend holding it have a stronger argument than the three who rate the stock as an underperform or sell.

Despite the challenges that Medical Properties Trust continues to face, I agree with Aldag's statement in the Q3 call that the "business model remains strong and stable." The bears on Wall Street could continue to be right over the near term, but I suspect the bulls are likely to be right about the stock over the long term.