Professional gamblers will tell you that chasing losses can lead to financial ruin. Basically, chasing losses occurs when someone tries to quickly recoup their losses by making larger and larger bets, assuming that the “luck” must eventually change. The same theory applies to investing. Sometimes investors continue to invest in the same stock as it falls, assuming it will eventually rebound. Many never do. Although still risky, this strategy is best suited to the highest quality businesses, e.g. Microsoft (NASDAQ:MSFT). Do it with the real estate investment trust (REIT) Medical Properties Trust (NYSE:MPW) is perilous.
Medical Properties Trust is extremely popular with retail investors and is heavily covered by analysts who cater to this audience. Part of its appeal is its high yield, currently almost 18%. But as I wrote in details here, dividend growth is often much better for investors than high yields. Stocks often have high returns because they are lower quality or riskier. This causes the stock price to fall and the market demands a much higher than average return to hold it. As shown below, Medical Properties Trust has lost 75% of investors’ money since the start of 2022, even including the massive return.
This REIT’s problems are numerous, including reliance on a few tenants, a major tenant with financial problems, and the need to sell assets to pay down debt. The dividend was cut by almost half in August.
There are better dividend options. Here are two to consider.
1. Vici Properties
Some of the most famous properties in the world line the Las Vegas Strip, such as Caesars Palace, MGM Grand, Venetian, Mandalay Bay and many more. Companies such as Caesars Entertainment (NASDAQ:CZR) And MGM Resorts (NYSE:MGM) does not own them. Instead, real estate investment firm Vici Properties (NYSE:VICI) do. Vici also owns other famous properties, such as Chelsea Piers in New York. It owns 92 properties in 26 states and one Canadian province.
One of the benefits of being a homeowner is that income is consistent despite economic challenges. Vici collected 100% of rents while many casinos were closed during the 2020 pandemic. It even increased the dividend during this time. The dividend has increased every year since the trust was established in 2018 and now yields more than 5%. Its recent growth rate is higher than many players in the industry, as shown below.
Lease contracts between Vici and its tenants are long, averaging 42 years, so it doesn’t have the same occupancy concerns as a typical office building or shopping center. Most leases are also linked to inflation; rents increase with the consumer price index (CPI). This is essential to keep up with rising prices and provide investors with a growing dividend.
Unlike MPW, Vici does not sell assets. He is buying more and expanding his activities outside of gaming to include golf courses, bowling alleys, lodging and international opportunities. The expansion adds to Vici’s revenue and strengthens its ability to continue its industry-leading dividend growth rate. Vici is a great option for dividend investors.
2. Reservation of assets
Maybe you’re not a dividend investor, or you are but want to diversify a little. Reservation of funds (NASDAQ:BKNG) worth the detour. Reservation is very profitable and produces tons of free cash flow (FCF) – or cash flow after business investments and capital expenditures – but it uses it differently than dividend stocks.
Booking is the world’s largest online travel booking service and owns brands including Booking.com, Priceline, KAYAK and OpenTable. It also competes with Airbnb (NASDAQ:ABNB) for short-term rental reservations. However, Booking focuses on rentals available through property managers rather than individual hosts.
Booking’s revenue and free cash flow fell during the pandemic due to the travel slowdown, but rebounded to record levels, as shown below.
Booking can generate this huge 38% FCF margin because the company is very capital intensive, meaning it doesn’t spend a lot of capital on tangible assets (capital expenditures, also known as investments). Investments do not appear on the income statement as an expense, but they reduce the cash available to issue dividends, invest in growth, or repurchase shares.
In the third quarter of 2023, only $251 million, or 1.5% of revenue, was used for investments. This frees up cash that the company uses to buy back its shares. Many investors (including me!) prefer that companies repurchase stock rather than pay a dividend, because stock repurchases do not constitute taxable income for shareholders. Buybacks reduce the number of shares available, thereby increasing the value of the remaining shares outstanding. Booking has spent $14.5 billion since January 2022 on buybacks, which has reduced its share count by 13%.
Booking’s stock trades at a price-to-earnings (P/E) ratio of 25. Historically, it’s difficult to judge this since the ratios became shaky when the pandemic decimated profits. However, it is less than Expedia (NASDAQ: EXPE) and superior to Airbnb. I think the valuation is fair given Booking’s profitability, growing revenue and exceptional free cash flow. However, it makes sense to use cost averaging, given the market’s rise to near-record levels.
Unfortunately, Medical Properties Trust has not been kind to investors. Before spending a lot of money, consider alternatives like Vici Properties and Booking Holdings.
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Bradley Guichard holds positions in Airbnb and Vici Properties. The Motley Fool holds positions and recommends Airbnb, Booking Holdings and Microsoft. The Motley Fool recommends Vici Properties. The Motley Fool has a disclosure policy.
Forget Medical Properties Trust, These 2 Stocks Are Better Buys Right Now was originally published by The Motley Fool