Wednesday, December 14, 2022

Can This 9.7% Yielder Possibly Be Safe?

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Can This 9.7% Yielder Possibly Be Safe?

Marc Lichtenfeld, Chief Income Strategist, The Oxford Club

Marc Lichtenfeld

Usually, when a stock has a dividend yield approaching or exceeding double digits, it's for a good reason. That means the stock and/or dividend is quite risky.

Medical Properties Trust (NYSE: MPW) has a yield of 9.7%. So can investors expect the company to sustain such a high yield?

The Alabama-based real estate investment trust (REIT) is the landlord for hospitals and is the second-largest nongovernmental owner of hospitals in the world. The majority of its 434 properties are located in the U.S., followed by the U.K., Switzerland and Germany.

The stock has been smashed this year, falling 49% year to date, which is one reason the yield is so high.

In April, a short seller went public with their bear thesis that the company's business was slowing and the stock was overvalued. That led to a dramatic fall in the stock price. It has recovered a little bit since hitting a bottom below $10 in October, but it's still half of where it was in January.

While the short seller has been right about the stock price's direction, they have been wrong about the company's business deteriorating.

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Funds from operations (FFO), the measure of cash flow that we use for REITs, is expected to grow this year to $1.08 billion from $976 million. Next year, FFO is forecast to remain flat.

Chart: Medical Properties Trust's FFO
 

This year, Medical Properties Trust is projected to pay out $694 million in dividends, for a payout ratio of 64%. Next year, Wall Street expects the payout ratio to inch up to 66% on an anticipated $713 million in dividends paid.

The company's yearly dividend per share has been higher in each of the past 10 years, giving it a strong dividend-raising history.

The stock may have been creamed this year, but the dividend is easily covered by FFO and the 10-year track record of annual dividend increases suggests that management takes the dividend very seriously.

Despite the sky-high yield, Medical Properties Trust's dividend is safe.

Dividend Safety Rating: A

Dividend Grade Guide
 

If you have a stock whose dividend safety you'd like me to analyze, leave the ticker in the comments section.

Good investing,

Marc

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