Some stocks pay you handsomely every quarter just to own them. Other stocks do not offer this advantage, but have enormous upside potential. But there aren’t many stocks that fit the two groups perfectly.
Medical Properties Trust (MPW -0.12%) (MPT) is an exception. This dividend-paying stock has an ultra-high yield of over 14% – and Wall Street thinks it could climb 56%.
A common root cause
There is actually a common root cause for MPT’s juicy dividend yield and the large difference between its current stock price and the consensus price target. This common denominator is the sharp drop in the stock. MPT’s stock price has plunged more than 60% in the past 12 months.
REITs (REITs) like MPT often offer high dividend yields. However, MPT’s return has always been close to the 4% to 8% range. The return hit double digits as the stock sold off.
The stock’s huge upside potential isn’t due to Wall Street analysts raising their price targets. Most analysts have maintained a relatively stable outlook for MPT over the past year. Importantly, they kept their price target close to the same level despite the significant drop in MPT’s share price.
To be sure, there are varied opinions on Wall Street about MPT’s near-term prospects. Of the 14 analysts polled by Refinitiv in April, six rate the stock as a buy or a strong buy. Five analysts recommend keeping the title. One analyst has an underperforming rating on MPT and another recommends investors sell shares of the healthcare REIT.
behind the decline
Why has MPT’s stock dropped so much? There are three main reasons.
One factor is that interest rates have risen sharply since the start of last year. REITs are particularly hard hit by rising interest rates, as they typically rely heavily on borrowing to fund the purchase of properties.
A second and even bigger problem for MPT is that several of its hospital operating tenants have faced financial difficulties. Pipeline Health was reorganized under Chapter 11 bankruptcy laws. Prospect Medical was unable to pay its rent in full this year.
The third reason for MPT’s decline is the impact of short seller attacks. Last week, the health FPI filed a complaint against short seller Viceroy Research. MPT said Viceroy “has repeatedly released baseless allegations to drive down the company’s stock price.”
Is Wall Street right?
If MPT stock can reach anywhere near Wall Street’s price target over the next 12 months, the stock is a no-brainer buy. But is Wall Street right? There are two answers to this question, in my opinion.
First, I think analysts are correct that MPT’s stock price should rise. The REIT has announced good news in recent weeks with the sale of 11 Australian properties. MPT was able to fully collect all rent owed by Pipeline despite the hospital operator’s bankruptcy. The sale of facilities in Connecticut that are operated by another beleaguered tenant, Prospect, is expected to close within months.
The overall financial outlook for hospital operators is improving. MPT CEO Ed Aldag said on the company’s fourth quarter conference call, “We find the outlook for our tenants extremely encouraging on all fronts.”
MPT issued a letter to shareholders last week in which Aldag makes a strong case for the company (and the stock). He highlighted, among other things, MPT’s excellent underwriting track record, well-diversified portfolio and continued strong business performance in a challenging market.
What is the second answer to the question of whether or not Wall Street is right about MPT’s upside potential? It’s a maybe. I don’t know if the stock will climb 56% over the next 12 months. It is certainly possible. However, many factors could prevent such an impressive rebound, including continued high interest rates and the possibility of an economic recession.
I predict that MPT stock will provide a solid return over the next year, but perhaps not as much as the consensus price target reflects. I also predict that its exorbitant dividend yield will drop somewhat – not because of the dividend cuts, but rather because of the stock’s rise. MPT’s dividend yield won’t stay above 14% for too long, if I’m right.
Keith Speights holds positions with Medical Properties Trust. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.