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With the new bull market in full swing and making ripples thanks to frothy bets on artificial intelligence stocks, dividend investors are aiming to do the same thing they always have: find a secure source of income. But the most solid dividend stocks tend to be expensive for that very reason. Dividend yields are usually on the lower side because it’s less risky to bet on established companies.
On the other hand, betting on a downtrodden player to come back offers the potential for big future returns at the cost of some uncertainty, perhaps for some time now. But that doesn’t mean all struggling dividend companies are smart investments. Here are some very attractive stocks that you might want to avoid buying right now, bull market or not.
This company’s balance sheet still has a lot of room for improvement.
There’s a lot of evidence to suggest that Medical Property Trust (New York Stock Exchange:MPW) The company’s stock, a relatively slow-moving healthcare real estate investment trust (REIT), won’t provide shareholders with a reliable flow of cash.
Part of that evidence has to do with the company’s $10.1 billion in unmanageable debt, nearly $3 billion of which is due in 2026. Another piece of evidence is its trailing twelve month (TTM) operating profit (CFO) of $551. Over the past three years, his 1 million share has fallen by 21%, and with no signs of recovery, the goal of debt repayment is moving further and further away. Additionally, the property is currently in trouble with its largest tenant, Steward Healthcare, which has fallen into partial rent arrears multiple times in the last year. And last but not least, there’s the fact that it has already cut its dividend in mid-2023.
But perhaps the biggest reason why MPT is not a reliable stock to buy for its dividend income is that investors lack confidence in the company’s management.
For example, in late 2022, it authorized a stock repurchase program of up to $500 million that expires in late 2023. Companies often announce such programs to boost investor confidence, as having surplus cash to return to shareholders is a sign of financial strength. Of course, MPT did not actually have enough surplus cash flow to distribute to shareholders at the start of the program, so the overwhelming majority of the allocation went unused. It is unclear what the purpose of the move was.
There are other communications that raise questions. In its first-quarter 2022 earnings call, company leaders praised Tennant’s strong performance and the company’s history of delivering dividend growth. Remember, at the time, the dividend cut was a little over a year away, and some commentators were already noticing cracks in the foundation. It’s hard to believe that executives didn’t realize there was a problem brewing.
The Q1 2023 earnings update then highlighted how the REIT’s recent performance “establishes a benchmark level of profitability that supports our dividend payments and sets us up for continued growth.” Management remained bullish about the future. Those who invested based on that confidence subsequently saw the value of their stocks drop significantly, and so did their income.
Don’t expect relief from the bull market here
The unlikely outcome is that the new bull market acts as an updraft, pushing all stocks up, including Medical Properties Trust. In such a situation, those who are currently investing in this REIT may see the stock price rise. It’s also possible that MPT could sell enough assets to survive debt repayments over the next few years and ultimately become financially sustainable in the long term.
However, these scenarios are not investment thesis that actually put your portfolio at risk. They are somewhere between ambition and pipe dream. And it’s not clear that investors have access to enough quality information from insiders to make quality decisions, given the messages from management. Therefore, avoid buying shares of this company. Also, don’t let a high dividend yield fool you into thinking that the dividend is actually guaranteed to arrive as advertised.
Should you invest $1,000 in Medical Properties Trust now?
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Alex Karkidi has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
Looking for a reliable dividend stock in the new bull market? Avoid this stock.Originally published by The Motley Fool
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