Some companies do not compete with each other in the market. But they are in a way competing for investors.
International office equipment (IBM -0.43%) and medical property trust (MPW -1.69%) Provides a good example of this. IBM, of course, is a technology company that has been around for over a century. Medical Properties Trust is a real estate investment trust (REIT) that leases properties to hospital operators. Both stocks have attracted significant interest from income investors due to their very high dividend yields.
Which High Yield Dividend Stocks Are Better Right Now? Here’s how IBM and the Medical Properties Trust (MPT) stand up against each other.
MPT’s $5.2 billion market cap is just a fraction of IBM’s over $114 billion market cap. However, healthcare REITs outperform tech giants when it comes to their respective dividend yields.
IBM’s dividend yield of over 5.4% is the highest it has been for most of the last 20 years. But it doesn’t come close to MPT’s very high dividend yield of 14%. The yield was boosted by a sharp drop in REIT stock prices.
It doesn’t matter how high the dividend yield is if you can’t rely on it. How sustainable are IBM and MPT’s dividends?
At first glance, it might appear that IBM’s dividend is in jeopardy. The company’s dividend payout ratio is over 300%, an astronomical high level.
But IBM’s Q1 update has probably convinced investors that the dividend is still safe. Importantly, the company generated more free cash flow in the first quarter than in the same period last year. Last year, IBM’s free cash flow far exceeded what it needed to pay its dividend.
Some investors may also be concerned about MPT’s dividend. Some REIT tenants are facing significant financial problems. I have been late paying my rent so far this year. However, MPT management believes the company can continue to raise dividends at current levels. As with IBM, MPT’s first quarter results suggest that the dividend is not in immediate danger.
IBM reported a modest year-over-year revenue growth of 0.4% in the first quarter of 2023. However, the number looked somewhat better on a constant currency basis, with an increase of 4.4%.
The company expects full-year 2023 revenue growth of 3% to 5% on a constant currency basis. However, as a result of foreign exchange headwinds, we expect only flat earnings overall.
Longer term, IBM could enjoy stronger growth due to surging demand for its artificial intelligence technology. The company is also ranked as one of the leaders in quantum computing, which could become a huge market in the future.
IBM’s near-term growth prospects are less impressive, but better than MPT. REIT revenues were down nearly 15% year over year in the first quarter. Perhaps the most important financial metric for MPT, normalized funds from operations fell 21%.
Don’t expect MPT’s growth to improve anytime soon. CEO Ed Aldag said on the company’s first quarter conference call.
Both of these stocks appear to be attractively valued. IBM stock is trading at about 13 times expected earnings. MPT’s forward earnings multiple is close to 10.5.
Are High-Yielding Dividend Stocks Better?
Most investors should feel comfortable buying IBM stock. Despite the company’s challenges, the dividend seems safe. IBM’s growth prospects also look better than MPT’s.
But I wouldn’t be surprised if MPT delivered a bigger total return in the years to come. REIT dividends appear to be holding up better than some might think. Also, if MPT has good news, it could benefit from a short squeeze.
Keith Speights holds a position with the Medical Properties Trust. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool’s U.S. headquarters has a disclosure policy.