Investors often find themselves drawn to dividend stocks boasting high yields due to the promise of above-average income. However, such allure comes with a caveat of heightened risks. Should a dividend’s sustainability falter and prompt a company to reduce its payout, investors may find themselves in possession of a less appealing investment.
Currently offering a substantial yield of 13%, Medical Properties Trust (NYSE: MPW) catches the eye of income-seeking investors. This figure significantly exceeds the S&P 500’s modest average of 1.4%. Yet, amidst the ongoing transformations within the company, this dividend may not represent the safest choice for income-oriented investors.
Nonetheless, there exist alternative reasons to consider acquiring shares, albeit accompanied by elevated risk tolerance.
Medical Properties Trust’s Attractiveness Lies in Its Depressed Valuation
Operating as a real estate investment trust (REIT) specializing in hospitals, Medical Properties Trust has grappled with challenges stemming from tenant rent payment issues, notably with Steward Health Care, amid the pandemic’s onset. This concern prompted the REIT to unveil a strategy at the beginning of the year aimed at bolstering Steward’s liquidity and fortifying its financial position.
Given these circumstances, Medical Properties Trust has not been immune to risk in recent times, a sentiment reflected in its plummeting stock valuation. Since 2021, the REIT’s valuation has plunged nearly 80%. Presently, the stock trades at a mere 0.4 times its book value, accompanied by a price-to-earnings multiple of less than 7. Such substantial markdowns may entice contrarian investors seeking opportunities.
Optimism Surrounds Medical Properties Trust’s Prospects for Rebound
The year 2023 proved challenging for Medical Properties Trust, culminating in a net loss of $556 million, attributed to significant write-downs and impairment charges. Such setbacks are unexpected for a REIT, typically considered a relatively secure investment due to its core function of rental collection from tenants.
Should the absence of further impairment charges materialize this year and the company succeed in aiding Steward’s liquidity enhancement efforts, prospects for 2024 appear more promising.
Additionally, the exploration of asset sales to inject $2 billion into its liquidity underscores a commitment to bolstering safety and stability. However, the potential trade-off involves reduced portfolio assets and consequent rental revenue, potentially imperiling the current dividend, which faced a reduction last year.
Nonetheless, if asset sales and enhanced liquidity culminate in a fundamentally safer investment landscape, Medical Properties Trust could emerge as a more favorable long-term investment option.
Assessing the Risk-Reward Ratio
For most dividend investors, Medical Properties Trust presents a less-than-ideal choice due to the uncertainty surrounding its dividend sustainability, which could lead to future disappointment.
Conversely, for those eyeing a potential turnaround play and willing to embrace the inherent risks, Medical Properties Trust could offer a compelling prospect. Should the turnaround plan materialize successfully, coupled with its deeply discounted valuation, the stock may yield substantial returns in due course.
