It’s not often that Safety Net gets it wrong, especially when it comes to dividends it deems safe. Last year, we looked at Medical Properties Trust (NYSE: MPW).
At the time, the company had plenty of cash flow, a low enough payout ratio and a solid history of annual dividend raises – everything Safety Net looks for in a dividend stock.
Despite its then-high 9.7% yield, Safety Net gave Medical Properties Trust an “A” for dividend safety.
Today, it’s a different story.
Medical Properties Trust, an Alabama-based real estate investment trust (REIT), is a landlord for hospitals and is the second-largest nongovernmental owner of hospitals in the world.
The REIT’s yield is still over 9%, despite the stock having fallen roughly 40% since December 2022. Even though the company was still generating plenty of cash flow, Medical Properties Trust slashed the dividend, which is a cardinal sin when analyzing dividend safety.
The company lowered the most recent quarterly dividend to $0.15 from $0.29 as it reduced debt and dealt with lower funds from operations (FFO), the measure of cash flow we use for REITs.
FFO isn’t expected to be much lower this year, just a $7 million drop from $934 million to $927 million. While we never want to see FFO go down, Medical Properties Trust can still easily afford the expected $628 million in dividends this year. And the amount paid in dividends will be even lower than that next year, as the company paid a higher dividend in the first two quarters of this year.
Management said it wants the payout ratio to be less than 60%, which is a reasonable number.
So the main issues here are declining cash flow and the just-imposed dividend cut. Once a company gets comfortable reducing the dividend, it is very likely to do so again if business doesn’t improve. Despite declining cash flow, Medical Properties Trust still pays a higher dividend yield than its peers, and it could easily cut its dividend again.
Dividend Safety Rating: D
— Marc Lichtenfeld
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Source: Wealthy Retirement