Could This Be The Perfect Dividend Stock for Retirees?

Investors getting close to retirement generally want two things from their portfolio: income and stability.
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The Company in a Nutshell

  • Medical Properties Trust (MPW) is almost a pure play on hospitals. No matter what happens, we all need hospitals eventually.
  • This niche focus enables MPW to reach a greater cap rate compared to other health care REITs.
  • Although MPW focuses on acquisitions, it doesn’t forget its dividend growth policy.

Investors getting close to retirement generally want two things from their portfolio: income and stability. You have worked hard to build this nest egg and now is the time to relax and enjoy. To achieve this goal, finding stocks offering peace of mind along with a decent yield is the perfect match.

As mentioned in my article about the Dividend Triangle, the best way to ensure a dividend is safe is to find a growing business where management doesn’t hesitate to share the wealth. One company showing a solid dividend triangle and offering a decent yield is Medical Properties Trust (MPW). This Healthcare REIT offers retirees a 5.50% yield that comes with a dividend growth policy beating inflation.

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Let’s see what’s inside this REIT, shall we?

Business Model

Medical Properties Trust Inc is a healthcare facility REIT. The company operates one segment, which owns and leases healthcare facilities. Most of the MPW revenue is generated in the United States (59% of its portfolio), followed by United Kingdom (22%) and Germany (6%) and Switzerland (6%). The company considers merger and acquisition investments as a component of its operational growth strategy. It provides financing for a variety of facilities that require funds for acquisitions, sale-leasebacks, new developments, and expansion projects.

Source: June 2021 investors presentation

Source: June 2021 investors presentation

Steward Health Care System is MPW’s largest tenants with approximately 21% of the REIT’s portfolio. Steward Health Care is the largest physician-owned private for-profit health care network in the United States and attends to 2.2 million people during more than twelve million physician and hospital visits annually. While this still represents a major exposure to one tenants, management is well aware of this risks. A few years ago, Steward rented about 45% of all MPW’s properties. Today, the REIT shows a good tenants diversification.

Investment Thesis

With over 80% of its assets invested in general acute care hospitals, MPW has developed a strong expertise in this niche. Acute care facilities offer active but short-term treatments such as emergency services, intensive care, coronary care, cardiology, and neonatal intensive care. The company has the bulk of its assets in the U.S, but still benefits from some international exposure. We appreciate the REIT’s focus on diversifying its tenants as it recently reduced its exposure to its largest operator (Steward) by 45%. MPW is also improving its geographic diversification and now counts 35% of its revenue coming from outside the U.S. We like MPW’s growth by acquisition strategy because management has proven it can grow both its business and its dividend at the same time. MPW is a good fit for income-seeking investors.

Potential Risks

Since MPW focuses on acquisitions, the cost of growth comes from issuing additional debt or through issuing more units. Considering the current state of interest rates, this isn’t a short-term problem, but investors must monitor how the growth is being financed. In 2021, a few investment firms (RBC and BoA) have downgraded their ratings since MPW issued more units to funds further acquisitions. Each time MPW issues more units, it doesn’t only dilute the value for shareholders, but also increase MPW’s dividend burden. With a 5.5% yield, this is quite a bill to pay to shareholders. Those acquisitions helped MPW to diversify its portfolio and decrease its exposure to its largest tenants.

The exposure to Steward is still a source of concern. We have seen the impact of distressed tenants on other health care REITs in the past. Omega Health Care (OHI) offered only one dividend increase since 2018 when one of its largest tenants, Orianna went into troubles. Most recently, National Health Investors (NHI) went through a restructuring program that came with a dividend decrease after dealing with another distressed tenants (Bickford).

Steward’s financial situation seems solid so far with $600M in liquidity as of March 2021. The company looks well diversified with no individual market representing more than 33% of Steward’s total revenue and no hospital representing more than 8% of total revenue.

Dividend Growth Perspective

MPW started its dividend growth policy in 2013 and hasn’t stopped since then. Year after year, shareholders have received an average dividend increase of 5%. Since the REIT keeps its FFO payout ratio under control, you can expect low single-digit dividend increases in the future. Considering its relatively high yield, MPW is a great candidate for any income seeking-investors.

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If you are concerned about inflation affecting MPW’s revenue, please note that the REIT is using CPI-based escalators contracts. Most of their contracts include minimum escalators averaging nearly 2% annually and ~75% of CPI-based arrangements include inflation ceilings averaging approximately 4.5% annually. In other words, inflation is not going to eat up your dividend!

Valuation

To determine if MPW gives you a good value for your bucks, I’ve used the dividend discount model (DDM). The DDM is used to determine the intrinsic value of a stock based on a future series of dividends that grow at a constant rate. In other words, the model will give you the value to pay today for a stock that will pay and hopefully grow its dividends in the future.

I’ve used the annualized dividend payment ($0.28/unit quarterly = $1.12/year) and used an expected dividend growth rate of 4% for the next 10 years. This is in line with the past five years annualized dividend growth rate. After the first ten years, I’ve reduced the expected dividend growth rate to 3% to remain conservative. Since we are looking at a stable REIT with a solid dividend growth history, I’ve used a discount rate (expected rate of return) of 9%.

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Here are the results of my calculations:

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The table above shows various price depending on if you use an 8%, 9% or 10% discount rate. The intrinsic value obtained with the DDM is now $20.75. After reaching a peak value of $21.46 in April of 2021, the REIT is currently trading in line with the DDM intrinsic value. An investment in MPW right now isn't the best deal ever, but it will do a good job at generating income for your portfolio.

Final Thought

When I research stocks to be added to a retirement portfolio, I’m looking for stable businesses offering a minimum yield of 3.5%-4% with a dividend growth policy that will match the inflation. It seems that Medical Properties Trust ticks all the boxes.

I would remain cautious about its exposure to key tenants and follow MPW’s quarterly report with great interest. So far, the REIT has proven the resiliency of its business model, but it is not shielded from gluttony. Its growth by acquisition ambitions could be a double-edged sword.

Cheers,

Mike Heroux, Passionate Investor & founder of Dividend Stocks Rock

P.S. Are you concerned by the current state of the market? Download my free DSR Recession-Proof workbook and make sure you don’t suffer during the next market crash.

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