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written by reader MPW

By lcgeek, December 13, 2019

Travis, any thoughts on why MPW is dropping last couple of days? Didn’t see any specific news on them…like more shares offered which caused the last drop (which recovered nicely)

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Travis Johnson, Stock Gumshoe

There’s been no recent company-specific news of note, I expect the stock just got a bit ahead of itself, so when all the REITs fell about 3% in recent weeks MPW fell a bit harder. I still thin there’s potential to get to $23-24 by this time next year IF they establish more of a dividend growth expectation among investors (which would mean at least one more dividend increase next August, if not before). This is what I wrote back on November 1, after earnings, my opinion hasn’t changed since then:

That quarter, by the way, was mostly notable because they talked about a very large transaction pipeline (as much as $5 billion in possible deals that could close over the next few quarters, which is even more than the $3.7 billion they’ve done so far in 2019, their biggest deal year yet). Their properties are generating a “normalized FFO” that MPW says should be about $1.57 for the year, which is not huge growth at this point but does easily cover the $1.04 annualized dividend. Much of MPW’s performance in recent years has come from the fact that they went from barely covering the dividend several years ago to easily covering it now, which means that investors are again quite confident and are willing to buy the shares with a 5% yield instead of the 7-8% yield they insisted on in recent years.

That’s one leg of the stool of success for REITs, as I see it — you want the dividend to be easily covered by funds from operations, you want the dividend to grow, and you want a competitive level of current income. MPW now has two of those legs solidly in place, which has driven a rerating of the stock, and if the recent one-cent dividend hike becomes a pattern of dividend increases they’ll deserve a little bit more of a rerating. The upside is a bit more limited from here, since this is still a somewhat risky business (some rural hospitals, in particular, are in trouble, so MPW has had a few bankruptcies over the years… and government regulation or changes to things like Medicare reimbursement have meaningful impacts across the board with their tenants), but the increasing scale has been helping, and if they can establish a dividend growth trajectory I think the shares could pretty easily trade up by another 15% or so in the next year — add that to the 5% dividend, and that’s more than enough to make me happy… they’ll probably also do an equity offering at some point fairly soon to fund more growth, however, given that $5 billion pipeline, so if you’re looking to buy in bigger chunks you might wait for the dip that almost always comes when a REIT announces that they’re raising money.

I don’t know if this dip below $20 is “bottoming out,” it can certainly fall further, but I do still think it’s a reasonable valuation and the company should do well from here for patient compounders.

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