MPW

Why Medical Properties Trust Could Be Due for a Big Year in 2024

Medical Properties Trust (NYSE: MPW) is a potentially enticing stock for dividend investors to consider. At nearly 13%, its yield looks astronomical when compared to the S&P 500, where the average payout is just 1.5%.

The healthcare-focused real estate investment trust (REIT) is in an industry that should be fairly stable to invest in now that pandemic pressures have eased and are no longer disrupting day-to-day operations for hospitals. But alas, investors remain hesitant to take a chance on this troubled REIT.

Next year, however, should be a much better one for the stock.

Medical Properties' valuation looks dirt cheap

Medical Properties Trust struggled to win over investors not just this year but in 2022 as well. Investors don't want to hear about dividend cuts or tenants having issues paying rent. And both issues have plagued the REIT, leading to a sharp drop in the stock's valuation.

The stock has lost 57% of its value so far in 2023. And that's after falling 53% in 2022. Since the start of 2022, shares of MPT are down 80%. It has been bad news on top of bad news for the business, leading to an incredibly low valuation. Today, the stock trades at 5.5 times its forward earnings and just 0.34 times its book value.

Investors are discounting the stock heavily, which is a sign that they are doubtful about the REIT's prospects heading not just into next year, but for the long run. And that could be a mistake.

Why the stock could do well in 2024

Medical Properties Trust hasn't done well this year, but investors in general haven't been bullish on REITs in recent years. The Real Estate Select Sector SPDR fund is down 27% since 2022 as rising interest rates made investors bearish on REITs, which normally make for good dividend stocks to own. And with Medical Properties Trust doing particularly poorly of late, investors have been even more punitive toward the stock.

But a contrarian case can be made for investing in the business. One argument is that interest rate cuts may be on the horizon. Because REITs fund their property purchases with debt, having loans where interest rates are dropping should provide some cost savings as the debt is refinanced. Goldman Sachs projects that there could be two rate cuts in 2024.

Another potential catalyst for Medical Properties Trust is that the company's dividend, while lower, is more sustainable given the company's financial performance. Over the first nine months of the year, the REIT reported funds from operations (FFO) of $1.24 per share. FFO is a key metric for REITs and is often used instead of net income to help assess the company's financial strength. FFO factors out depreciation and gains or losses, which can have significant impacts on typical accounting income. At $1.24, that averages out to a quarterly FFO of $0.41 -- far higher than the $0.15 quarterly dividend that Medical Properties Trust currently pays.

If investors feel more comfortable about the dividend, that should lead to more buying -- and a higher share price.

Should you invest in Medical Properties Trust?

Medical Properties Trust should have a better year in 2024. That's actually not a difficult prediction given how poorly the stock performed over the past two years. That being said, it's still not the safest of stocks to be holding right now. The company is planning to sell assets to improve liquidity and investors may still have doubts about whether its payout really is sustainable. But if the REIT can build on its recent results and continue to show that its dividend is safe, then investors are likely to start buying up this badly beaten-down stock. It may just be a question of how long that takes.

If you have a low risk tolerance, you may want to consider other dividend stocks. But if you're OK with the potential short-term volatility in the months ahead, Medical Properties Trust could be worth taking a long-term chance on given its incredibly low valuation.

Should you invest $1,000 in Medical Properties Trust right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Goldman Sachs Group. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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