Nail Down Medical Properties Trust’s Stable 7.2% Dividend Yield
June 16, 2017
Today’s commentary highlights one of the biggest things I look for in a high dividend yield stock: a stable industry.
As I always like to remind readers, a stock with a high dividend yield typically has a bunch of risks surrounding it. Thus, it’s vitally important that we tread carefully when trying to “reach” for yield in the stock market. If we don’t, we can unknowingly step into a high-yield landmine and suffer serious portfolio damage.
In other words, we need to protect ourselves the best we can. And sticking to high-yield stocks in stable industries is one of the best ways to do that.
See, by focusing only on steady industries, we can help minimize one big threat to our portfolio: rapid change. While change–specifically technology-related change–is great for society, it isn’t always the best for us investors.
Why? Well, as investors, we need to be able to forecast a company’s cash flows with some decent accuracy. And a lot of change in a company’s sector has a way of wreaking havoc with those estimates.
With that in mind, let’s look at one of my favorite high dividend yield stocks at the moment, Medical Properties Trust, Inc (NYSE:MPW).
Medical Properties Playbook
For readers who aren’t familiar with Medical Properties Trust, there are two main things about its business model that are comforting.
First, Medical Properties operates as a real estate investment trust (REIT), acquiring and developing properties. As you know, property development isn’t exactly a rapidly changing business. Second, the company only focuses its purchases within the healthcare sector, which is also incredibly stable.
So, unlike many other REITs that invest in shopping malls or office buildings, Medical Properties is far less exposed to the fickle economy.
Specifically, the company purchases and develops acute care hospitals of all different types. It then leases the facilities to hospital operators under long-term leases. A big positive of these leases are that the tenant bears most of the operating costs of the property.
In other words, Medical Properties acts as a giant landlord to hospital tenants that pay their own utilities.
Another thing that makes Medical Properties unique is that they also provide financing for their hospitals. For example, the company provides up to 100% financing for things like acquisitions, replacement facilities, and building expansions. In other words, the company has a direct hand in helping their own hospitals grow profitably.
One more positive feature about Medical Properties is its geographic diversification. Nearly 20% of the company’s revenue is generated outside of the United States, specifically in Europe. Within the U.S., its revenue is decently distributed among roughly 30 different states.
So, not only does Medical Properties benefit from a steady business model, its diversified nature adds another layer of safety.
Hospital Highs
But has the company’s stability actually fueled strong results of late? Well, in the first quarter, Medical Properties’ revenue climbed 16%, to $156.4 million from $135.0 million in the year-ago period. So I’d definitely say so.
Moreover, net income clocked in at $68.0 million. That’s up from $57.9 million from a year ago. Thus, it’s quite clear that the company’s hospitals continue to perform well.
Even more impressive is that Medical Properties’ balance sheet also continues to strengthen. That’s thanks in large part to a successful equity offering in April, the company now sports industry-low leverage ratios.
How low, you ask? Well, the company is in such a strong financial position that it can make about $1.5 billion of additional investments and still stay within reasonable debt levels.
Medical Properties’ operating momentum and financial strength are just a few more reasons why it will allow you to sleep at night.
“During long-term investments, tenant issues will occasionally arise, but MPT has demonstrated its ability to resolve such issues while continuously collecting its rent,” said Chairman and Chief Executive Officer Edward Aldag, Jr. (Source: “Medical Properties Trust, Inc. Reports First Quarter Results,” Medical Properties Trust, May 4, 2017.)
Robust Cash Flows
But, as income investors, what we really need to see is cash flow.
A stable business model is great, diversification is nice, a strong balance sheet is reassuring, and solid top-line growth is always a bonus. But, unless all of those things translate directly into healthy cash flows, there is no way we’ll be able to rely on the dividend. Thankfully, Medical Properties’ dividend is comfortably supported by strong cash flow.
In Q1, for example, the company’s normalized funds from operations (FFO), the cash flow metric of choice in the REIT sector, came in at $0.33 per share. Meanwhile, management paid out a healthy dividend of $0.24 during the quarter. That represents a highly comforting FFO payout ratio of 73%.
Given such a low payout ratio, I expect management to not only maintain, but grow, that dividend over time.
“[W]hatever the level of new acquisitions we may complete in the near-term, we believe their immediate cash returns and moreover their long-term GAAP returns will substantially exceed the cost of the related incremental capital,” said CFO Steven Hamner in a conference call with analysts. (Source: “Medical Properties Trust’s (MPW) CEO Edward Aldag on Q1 2017 Results – Earnings Call Transcript,” Seeking Alpha, May 4, 2017.)
High Dividend Yield at a Solid Price
That brings us to Medical Properties’ stock price, which has clearly underperformed over the past year.
The threat of rising interest rates is largely the cause of MPW stock’s sluggish performance. But, considering how steady Medical Properties’ business model and cash flows are, I believe those worries are a bit overblown.
In fact, Medical Properties shares now sport a rather juicy dividend yield of 7.2%. That yield is higher than the real estate industry average of five percent, as well as the company’s own five-year average of roughly 6.5%.
With Medical Properties management forecasting a strong 2017, I’d expect those spreads to narrow relatively soon.
The Bottom Line on Medical Properties Trust
And there you are: several reasons why Medical Properties qualifies as a stable, high-dividend-yield stock.
As is always the case, don’t view this article as a formal recommendation. Rather, see it as a potential idea worth digging into. That said, Medical Properties Trust is definitely a top income candidate, in my book.
