With the market selling off over the past year, many stocks are cheaper than they were. However, some stand out because they’re ridiculously cheap compared to their peers. Right now, two stocks with absurdly low valuations are Energy Transfer (ET 1.27%) and Medical Properties Trust (MPW 2.85%). Their dirt-cheap valuations are a big reason they offer dividend yields over 8%.
Both are compelling investment opportunities for those with a bit of capital to spare. They could turn a meager investment into a much larger payday over the long term.
Trading near the bottom of the barrel in its peer group
Energy Transfer bucked the trend in the broader market last year. The master limited partnership’s (MLP) unit price soared as it benefited from improving conditions in the energy market. However, even with that rally, it remains ridiculously cheap compared to its midstream rivals:
Image source: Energy Transfer Investor Relations Presentation. LTM = last 12 months. EV = enterprise value. EBITDA = earnings before interest, taxes, depreciation, and amortization.
That near-bottom-of-the-barrel valuation is a big reason Energy Transfer yields 8.5%. Because of that big-time yield, it could turn a $500 investment into $42.50 of passive income per year. That’s a nice base return.
There’s a lot more upside to that income stream. Energy Transfer recently achieved its targeted leverage ratio, freeing up its cash flow for other opportunities. The first order of business is to boost its distribution back to its former peak. That implies its already sizable payout should grow by another 15% this year. In addition, the company can use some of its free cash flow to gobble up its dirt-cheap units, which could help boost its valuation.
The company will also allocate a sizable portion of its excess cash toward expanding its vast midstream operations. The MLP has several expansion projects under construction that should help grow its cash flow this year. And others are in the pipeline to fuel future growth, including a large-scale liquefied natural gas (LNG) export facility.
Meanwhile, with its balance sheet back on rock-solid ground, the company has even more financial flexibility to make value-enhancing deals. These drivers could give the company more fuel to grow its big-time payout, increasing its ability to produce attractive total returns.
Getting back to full health
Shares of Medical Properties Trust went in the opposite direction last year, losing more than half their value. That drove the healthcare real estate investment trust’s (REIT’s) valuation toward the low end of its peer group. The company trades at less than seven times its funds from operations (FFO), well below the peer group average of around 11 times.
Weighing on the hospital-owing REIT’s valuation has been rising interest rates and the questionable health of some of its tenants. Higher rates forced it to pivot from offense to defense by shoring up its balance sheet. It sold $1.8 billion of assets last year and has another $650 million of deals on track to close in 2023. Those sales helped reduce leverage, boost its liquidity, and fund higher-returning investments.
Meanwhile, the company has received some good news on the tenant front in recent months. Pipeline Health has exited bankruptcy, leaving the REIT’s leases intact. In addition, top tenant Steward Health took several steps to shore up its finances and reduce costs. It also extended a key loan for one year, ensuring its liquidity. With Steward likely to keep paying rent, Medical Properties Trust should be able to maintain its 8.8%-yielding dividend.
These moves should continue taking the pressure off the REIT’s stock this year. Shares have already started to recover from last year’s slump as investors and analysts grow more optimistic about its prospects. However, with a big-time dividend and the potential to continue recovering, Medical Properties could produce healthy returns for investors in the coming years as it continues growing its hospital portfolio and dividend.
Enticing value propositions
Energy Transfer and Medical Properties Trust currently trade at incredibly low valuations, which is why they offer such high dividend yields. With catalysts ahead, those valuations should improve in the coming years. Add in their incomes, and they could produce market-beating total returns for long-term holders.
Matthew DiLallo has positions in Energy Transfer and Medical Properties Trust and has the following options: short February 2023 $10 puts on Medical Properties Trust and short February 2023 $11 puts on Energy Transfer. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.