A Member of Pat McKeough’s Inner Circle recently asked him about a Canadian stock that occupies a “cross-border” niche in the medical field. The company owns specialty surgical hospitals in the U.S.
Medical Facilities Corp. operated as an income trust until the Canadian government ended tax breaks for trusts in 2011. It continues to pay a monthly dividend yielding 8.0%, but Pat points out that the company pays a very high percentage of its cash flow to maintain the dividend. The stock also faces uncertainty over potentially changing rules and regulations regarding medical care in the United States.
Q: Pat: Can I have your opinion on Medical Facilities Corp.? Thanks for the ongoing advice.
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A: MEDICAL FACILITIES CORP. (symbol DR on Toronto; www.medicalfacilitiescorp.ca) owns majority interest in five specialty surgical hospitals in South Dakota, Indiana, Oklahoma and Arkansas. It also operates as an outpatient surgery clinic in California.
The company’s specialty hospitals perform scheduled surgical, imaging and diagnostic procedures. Their revenue mostly comes from the fees they charge patients, and their insurers, for use of the facilities. The outpatient centre specializes in surgical procedures where patients typically go home within 24 hours.
In the three months ended September 30, 2017, Medical Facilities saw its revenue increase 12.9%, to $89.0 million from $78.8 million a year earlier (all figures except share price and market cap in U.S. dollars). That was mostly due to a rise in the number of surgical cases, up 5.2% from a year earlier. Cash flow rose 17.2%, to $12.3 million, or $0.40 a share, from $10.5 million, or $0.34.
Demand for Medical Facilities’ services should rise as the U.S. population ages. Moreover, physicians who practice at its facilities hold a minority stake in the company. That reduces turnover.
Growth stocks: Change in regulations could slow growth for specialty hospitals
Medical Facilities converted from an income trust on June 1, 2011. It continues to pay a monthly dividend of $0.09375 (Canadian), and the shares yield a high 8.0%. In the latest quarter, the company paid out a high 70.7% of its available cash as distributions; that means there’s a strong possibility it will cut its dividend if earnings and cash flow suffer a setback. Medical Facilities’ reliance on a limited number of surgical centres also increases the risk of a shortfall.
Moreover, the company’s health care facilities are subject to numerous and constantly changing rules and requirements for hospitals and physicians. For now, that includes provisions in the U.S. Patient Protection and Affordable Care Act (known as Obamacare).
Those regulations (or any changes brought in by President Donald Trump) could eventually slow growth for operators of specialty hospitals. This adds some uncertainty to Medical Facilities’ prospects considering its plan to grow quickly through acquisitions.
Inner Circle recommendation: We don’t recommend shares of Medical Facilities Corp.
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