Up 35% in a Down Market: Is This 6%-Yielding Dividend Stock Still a Buy?

Shares of Medical Properties Trust (NYSE: MPW) have defied the market downdraft this year. The real estate investment trust (REIT) has rallied about 35%, significantly outperforming the roughly 10% decline in the S&P 500. That's a welcome turn for investors, given the stock's struggles in recent years.

Even with that big rally, shares of the healthcare REIT still offer a compelling dividend yield of more than 6%. Here's a look at whether it still has more upside ahead.

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What drove this year's rally?

The past few years have been very challenging for Medical Properties Trust. The REIT has battled tenant issues and higher interest rates. Those headwinds made it difficult for the company to refinance debt as it matured.

Medical Properties Trust has worked hard to address its tenant and balance sheet issues. It has sold several properties, which provided it with cash to repay debt as it matured. Meanwhile, even though two of its top tenants have filed for bankruptcy protection over the past year, the REIT has been working through those events to preserve the value of its real estate. It regained control of most of its real estate from one tenant last year, enabling it to sign leases with five new financially stronger operators.

Those new tenants have started paying rent this year. The rental rate will slowly escalate over the next two years, reaching the fully stabilized rate at the end of 2026 at about 95% of what that former tenant was paying on the properties. Meanwhile, its improving financial situation enabled it to capitalize on lower interest rates earlier this year to refinance about $2.5 billion of debt set to mature over the next two years, giving it more financial breathing room. That has taken some pressure off its balance sheet and stock price.

Is there any more upside potential left?

While shares of the REIT are up more than 30% this year, they're still down almost 80% from their peak a few years ago. That decline in its market value, along with asset sales and debt repayments, have driven down Medical Properties Trust's enterprise value from its peak of more than $24 billion to less than $12 billion.

That market valuation is worth noting because it's much lower than the underlying value of the REIT's real estate portfolio. Medical Properties Trust ended last year with $14.3 billion of total real estate assets. The value of its portfolio has held up relatively well because its facilities are crucial to providing care to their local communities. That has enabled the company to sell properties at strong valuations to repay debt in recent years. This valuation disconnect alone suggests that the stock has additional upside potential.

Meanwhile, its valuation doesn't currently reflect the income-generating capacity of its portfolio. The company reported $0.80 per share of normalized funds from operations (FFO) per share last year. That was down from $1.59 per share in 2023 because of rent collection issues, higher interest rates, and asset sales. Even at that lower rate, Medical Properties Trust only trades at about 6.5 times its FFO, which is a very low level for a REIT. With its FFO expected to rise steadily over the next two years as new tenants pay increasingly higher rents, the REIT's valuation will only get cheaper.

That rising rental income will also make its dividend safer. At its current quarterly rate of $0.08 per share, Medical Properties Trust's dividend payout ratio is 40% based on last year's normalized FFO, which is already a very low level for a REIT. Because of that, and the expected increase in its FFO this year, Medical Properties Trust could start rebuilding its dividend following two deep cuts in recent years. That would provide investors with an even higher base return from dividend income.

Still worth buying for income and upside

Shares of Medical Properties Trust have started to recover from their steep slide over the past few years. They still have a long way to go, given the underlying value of the REIT's real estate and the expected improvement in its income. Add in its high-yielding dividend, which could start growing in the future, and the REIT looks like a compelling buy right now, even after its rally. While it's riskier than other REITs, it also has a much higher total return potential as its recovery continues.

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Matt DiLallo has positions in Medical Properties Trust. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.