If you invested $4,000 in Medical Properties Trust in 2018, this is how much you have today

Medical Property Trust (MPW 1.82%) is a stock that has attracted investors for years. Given consistently mind-boggling yields and promises of steady growth over the long term, it’s easy to see why you might want to consider buying a few shares.

But this stock is one of those cases where all that glitters isn’t gold. To understand exactly what this means, let’s plot the return if he invested $4,000 in this stock just a few years ago in 2018.

You probably won’t be very happy with this investment

It’s easy to see why someone would want to invest in a Medical Properties Trust. This is a real estate investment trust (REIT) that owns hospital and clinic floor space and rents it out to medical companies. As a REIT, it regularly pays out large dividends to its shareholders, with a current expected dividend yield of about 15.7%. So while it may be tempting to buy just for the dividend, we have to pause because we have to consider past performance.

If you bought $4,000 worth of Medical Properties Trust shares five years ago in mid-2018, you’d be worth about $2,350 in aggregate now, down 41%. At the time of your purchase, the REIT’s dividend yield was likely around 7.5%. While this was high, it was not high enough to be alarming about its sustainability or the health of the company as a whole.

If you reinvest the money you collected from dividends during that time, you’ll get $3,107. For reference, if you buy an index fund like the one below, SPDR S&P 500 ETF Trust After reinvesting the dividends, the total return is $6,650. Therefore, MPT was not necessarily a star performer at the time.

what went wrong

In a nutshell, the company ran into some of the common but brutal problems REITs tend to experience.

Over the past five years, sales have continued to grow, with quarterly revenue increasing 73% to reach $350 million in the first quarter of 2023. To achieve this, MPT had to borrow money, which it used to purchase new properties and acquire tenants. to rent them. As a result, long-term debt has skyrocketed, now totaling more than $10.4 billion.

This is a significant amount compared to MPT’s capital, which means that lenders are likely to demand higher interest rates when borrowing new to buy more properties. The decline in the company’s share price is probably at least partly a result of the market pricing in the fact that future investment returns will be lower as a result of paying more interest.

Of course, MPT could and is still paying off its debt burden gradually. But every dollar spent paying off debt cannot be invested in growth or returned to investors in the form of dividends. In that respect, too, things did not go according to plan.

With much of MPT’s income being eaten up by rising interest payments, there is less money left to return to shareholders, and the dividend payout ratio will continue to rise, although it already stands at 232%. This means that the company’s dividends currently far exceed its earnings, so instead of paying dividends out of net income, the company will need to distribute its cash holdings directly to investors. . This situation can be remedied by increasing net income from rentals or reducing dividends. And the risk of a dividend cut is probably another factor that makes shareholders afraid to buy shares in the business.

But what do you do with this information? If you’re considering buying the Medical Properties Trust, don’t. The risk of a drastic cut in the dividend is too high. If you still own shares, you should consider selling. There is little reason to think that divine intervention is on the horizon, and more or less it is needed to turn this stock into an attractive buy at this point.

Alex Kalkidi has no positions in any of the mentioned stocks. The Motley Fool has no positions in any of the companies mentioned. The Motley Fool has a disclosure policy.

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