Is Medical Properties Trust Stock a Buy?

With a high forward dividend yield of 7.4%, Medical Properties Trust (NYSE: MPW) is of natural interest to investors seeking an income stream in their portfolios. Its business model, if executed conservatively, could indeed lead to steady and long-lived returns.

But this is probably not the right stock to buy if you're looking for dividend income. Here's why.

There's plenty of reason for caution

As you probably know, Medical Properties Trust a real estate investment trust (REIT) that focuses on buying and making equity investments in hospitals and clinical spaces to rent them out to hospital and healthcare companies.

The recent problems with MPT can be summarized in one chart:

MPW Total Assets (Quarterly) data by YCharts.

As you can see, its total assets, which are $15.2 billion, have fallen over the last three years as the company has been forced to sell off its properties to stay solvent relative to its debt load. It was still offloading its assets as of the third quarter.

As a result, its quarterly revenue, which was $255.8 million in Q3, also fell, as it had fewer sources of rental income. In the same period, its cash from operations (CFO) collapsed to reach $59.2 million in the third quarter. Out of necessity, its dividend was sharply cut as well.

At the heart of the company's issues is its debt load of nearly $9.3 billion. More than $1.2 billion of that sum is due in 2025, with an additional $2.1 billion due in 2026. There is no way that its operating cash flow will be enough to cover those debts even if 100% of it is dedicated to repayment. Therefore, more properties will be sold, and the top line will shrink further.

That is not to imply that investors who buy the stock today will be safe from seeing their dividend cut. Over the trailing-12-month (TTM) period, it paid out $364.1 million in dividends. Even with the recent cut, maintaining such a consistent cash outflow over the long-term seems unlikely, especially considering the business's need for capital for debt repayment and growth.

There isn't a bargain here

Some investors may point to MPT's low valuation as evidence for the stock being worth a buy despite its grim financials.

After all, its price-to-book (P/B) multiple of just 0.5 implies that the market is valuing the stock at less than the historical cost of its tangible assets. Such a wild disconnect is often a sign of the market overreacting and dumping shares of a business, perhaps one with a run of bad luck despite sound fundamentals.

But MPT's valuation makes perfect sense if you consider the current situation, in which its assets are being liquidated, often at a loss, to cover the burden of repaying the principal and interest of the debt that was used to purchase them. In other words, the company is consistently failing to generate returns in excess of its cost of capital across a hearty handful of its biggest investments.

The ranks of its senior leadership have not recently changed despite that situation coming to light. Therefore, there is little indication its capital allocation strategy is going to become more efficient than it was before.

Nor is there much hope that economic factors will give way to a more favorable operating environment anytime soon. There won't be a big influx of demand for hospital floor space. And while such spaces are presently scarce enough to be valuable, there isn't any driver for them to become more valuable than before.

In closing, you probably shouldn't buy Medical Properties Trust stock today, and it has long been time to sell if you are holding it. If you're still interested in investing in it as part of a turnaround play strategy, just watch it from the sidelines for now. There's no cost associated with waiting to see if it can somehow make headway on its pressing problems, and there's absolutely no rush to invest.

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Alex Carchidi 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.