The stock market has been soaring over the past year, but unfortunately that doesn't mean all stocks have been winners. Some are down big as elevated interest rates have made it difficult for companies to keep their costs down. And even once-promising and seemingly safe dividend stocks have had to reduce their payouts.
Medical Properties Trust (MPW -1.10%) slashed its payouts last year. And for a real estate investment trust (REIT), where the dividend is a key reason investors buy shares of the company, a sell-off often follows. Not only has Medical Properties' stock fallen to new 52-week lows, but the healthcare-focused REIT is also at such a beaten-down valuation that it hasn't traded at these levels since 2009.
Has Medical Properties Trust become so cheap that it is a no-brainer buy at this point?
The company still isn't out of the woods
Entering 2024, it looked as though the REIT might be on a more positive trajectory, with the hope that a decline in interest rates this year could help reduce costs and make it a more attractive investment.
But Medical Properties has faced issues with tenants not being able to pay their full rent, and that's a problem that remains today. On Jan. 4, the REIT said it was working with one of its top tenants, Steward Health Care System, to help strengthen its liquidity and "restore its balance sheet." This involved providing the company with a $60 million bridge loan.
Unsurprisingly, the news wasn't met positively, as shares of Medical Properties would tank following the news. And year to date, the stock is down more than 26%.
A big test will come later this month when the company reports its latest quarterly numbers. Investors should circle Feb. 21 on their calendars. That's when management has scheduled its earnings call, and that could lead to another volatile day for the healthcare REIT.
Does the low price offset the risk?
By now, investors are likely well aware of the risk that comes with Medical Properties' stock. Its shares haven't been this cheap since 2009, and for good reason. Investors don't have a lot of confidence in the REIT's tenants. At less than 7 times its estimated future earnings, the stock would appear to be cheap. And according to the consensus price target of $8, Wall Street analysts believe the stock could more than double in value.
But the problem is that the company's situation is constantly evolving. Analysts update their expectations for a stock based on new developments, which means those earnings expectations and price targets can -- and likely will -- change in the future. If this was just the case of a REIT being down due to high interest rates, it could be a slam-dunk buy. But that isn't the case, and its problems go deeper than that.
The uncertainty with one of its top tenants is what makes it difficult for investors to determine what a good price for the business is. If the situation deteriorates, earnings could worsen. In its most recent quarter, for the period ended Sept. 30, 2023, the company reported funds from operations of $216.4 million, which was down 14% year over year.
Last year, the REIT reduced its quarterly dividend from $0.29 to $0.15. But at the stock's reduced price, the yield remains high at over 16%. It's natural to worry about that high a payout and whether it's still sustainable. Investors might not get answers even after the latest earnings numbers.
As a result, it's difficult to say that even at the reduced price, the stock's valuation is low enough that it offsets the risk. Another dividend cut, or news that the situation with Steward hasn't improved, could result in the stock going into another tailspin.
Should you take a chance on Medical Properties Trust?
The prudent thing for investors to do would be to wait for at least two earnings reports, and possibly three, before making a decision on the stock. Even if the results for the current quarter suggest that the REIT is in better shape, that might not be enough to prove that the stock is a viable investment.
The situation involving Steward doesn't appear to have a quick fix, and since it's a private company, investors can only gauge the situation based on information that Medical Properties provides. Simply saying that things are better might not be sufficient proof. The proof will be multiple quarters of consistent earnings numbers from the REIT and dividend payments. Anything less than that, and investors could be taking on a big risk with this dividend stock.
For those craving high-yielding stocks, there are better and safer options to consider than Medical Properties Trust.
