Is Another Dividend Cut Coming for Medical Properties Trust?
When a dividend stock's yield is exceptionally high, there's usually some concerning cause behind the elevation. If a dividend was considered safe, investors would be buying up the high-yielding stock, pushing the share price up and the yield down. When that isn't happening, it can often be a sign that investors are not optimistic about the company's ability to continue paying such a high dividend.
Medical Properties Trust (NYSE: MPW) currently pays its investors a dividend that yields nearly 15%. That's far higher than the S&P 500 average of 1.4%. And that's even after the real estate investment trust (REIT) reduced its dividend payments last year.
Given the REIT's high yield and that it still faces issues with select tenants, should investors brace for the prospect of yet another dividend cut this year?
The Steward Health bankruptcy creates a lot of uncertainty for the business
Investing in a healthcare-focused REIT may seem like a safe option for dividend seekers, but that hasn't been the case at all for Medical Properties Trust (MPT) investors. The company has been plagued with rent collection issues, especially with one of its largest tenants, Steward Health.
Earlier this month, Steward Health filed for bankruptcy and announced it would be selling all 31 of its hospitals. While transitioning away from Steward may end up being a positive development for MPT, there's no guarantee that the buyers will be in solid financial positions and that MPT won't still continue to have problems with these hospitals. Plus, if the process takes longer than expected, MPT may have to provide Steward with more financial assistance; it has already put up a $75 million bankruptcy loan to help its troubled tenant, and Steward may need another $225 million later on.
MPT is already sitting on a significant debt load of $10.1 billion as of March 31, which has been increasing over the past decade.
MPW Total Long Term Debt (Quarterly) data by YCharts
Is the dividend sustainable?
During the first three months of the year, MPT incurred a loss per share of $1.23 as a result of impairment charges, primarily due to Steward. When factoring those items out, the company's normalized funds from operations (FFO) were $0.24 per share, which is higher than its current quarterly dividend rate of $0.15. But that normalized FFO was also down from $0.37 in the prior-year period. MPT says the decline is mainly due to a drop in Steward-related revenue.
Steward's name is littered all over MPT's financials, highlighting just how significant the current situation is with the healthcare company and the impact it may have on MPT.
If MPT were to be able to maintain the status quo, then arguably, the dividend may be sustainable. But the problem is that MPT's situation is uncertain right now and far from stable. While it's tempting to assume that things will get better in the long run, there's still plenty of risk here for investors.
Should investors expect a dividend cut?
MPT's high debt load and near-term uncertainty suggest that a change to its dividend may be coming once again. But without knowing the outcome of the sale of Steward's hospitals and what the future will look like, it may be difficult for MPT to estimate what payout size is manageable. A cut may indeed be coming, but in the short term, I suspect a suspension in the dividend may make more sense in order to give MPT more time to reassess its financial position, while also freeing up some important resources.
Investors look to the REIT primarily for the dividend, but without much stability in recent years due to problems with tenants, people haven't been eager to buy the stock. In the past three years, MPT's shares have crashed by 76%. And until the issue with Steward is sorted out, investors are still likely better off taking a wait-and-see approach with this stock, because it remains a highly risky investment.
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
