Iron Mountain Inc: Earn a Growing Dividend Yield of 6.7%
Income Investors: Consider This Dividend Growth Stock
In this day and age, income investors often have a tough decision to make. They can either go with stocks that offer high current payouts, or choose a low-yield company that has dividend growth potential.
But what if you want both? Well, in that case, you should take a serious look at Iron Mountain Inc (NYSE:IRM), a real estate investment trust (REIT) headquartered in Boston, Massachusetts.
In today’s market, the most well-known real estate companies tend to own office buildings and shopping centers. Iron Mountain Inc, on the other hand, is quite different. The company specializes in storage and information management and has been in business for more than six decades.
As of December 31, 2017, Iron Mountain’s portfolio consists of more than 1,400 facilities totaling over 85 million square feet. They are located across 53 countries on six continents. (Source: “Durable Business Drives Cash Flow and Dividend Growth,” Iron Mountain Inc, last accessed June 29, 2018.)
Through these facilities, the company stores and protects its customers’ valued assets, such as critical business information, highly sensitive data, and cultural and historical artifacts.
Now, you might think that there can’t be that many people who have valuables that need professional storage solutions. But you would be surprised at the actual size of Iron Mountain’s customer base. In fact, by the end of last year, Iron Mountain was serving more than 225,000 customers, including 95% of Fortune 1000 companies.
IRM Stock Returns Cash to Investors
With a huge business in place, Iron Mountain can return cash to investors.
Right now, the company pays quarterly dividends of $0.5875 per share. Trading at $35.16 apiece, IRM stock offers an annual yield of 6.7%. To put it in perspective, the average dividend yield of all S&P 500 companies stands at just over 1.8% at the moment. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed June 29, 2018.)
Usually, when investors pick a stock with a high current payout, they would have to forgo some of the future dividend growth. But with Iron Mountain Inc, shareholders have been collecting both.
Over the last five years, the company’s quarterly dividend rate has more than doubled. (Source: “Historical Dividends,” Iron Mountain Inc, last accessed June 29, 2018.)
And if you are wondering whether those dividend hikes were a bit too aggressive, don’t worry. Despite those payout increases, the company still makes more than enough money to cover its dividends.
In the first quarter of 2018, Iron Mountain Inc generated adjusted funds from operations (AFFO) of $222.0 million, representing a 30% increase year-over-year. For full-year 2018, management expects the company to deliver revenue growth of seven to nine percent and AFFO growth of between five percent and 13%. (Source: “Iron Mountain Reports First Quarter 2018 Results,” Iron Mountain Inc, April 26, 2018.)
Most importantly, Iron Mountain’s expected AFFO would allow it to achieve a payout ratio of 81% for the year, leaving a sizable margin of safety.
Collect Inflation-Proof Dividends
And the best could be yet to come. During its latest investor presentation, the company said that it is targeting a dividend growth rate of five percent for 2018 and four percent annually for 2019 and 2020. (Source: “Durable Business Drives Cash Flow and Dividend Growth,” Iron Mountain Inc, op cit.)
This should allow IRM stock investors’ dividend income stream to grow at a higher rate than the expected annual inflation rate of 2.2% for these three years.
At the same time, management expects the company’s AFFO payout ratio to drop to between 70% and 75% by 2020. For risk-averse income investors, a lower payout ratio would certainly be good news.
And don’t forget that Iron Mountain Inc’s dividends are already backed by rock-solid operations. While the storage business is not really exciting, the high switching costs mean that the business is extremely stable. In fact, 50% of all boxes stored at Iron Mountain 15 years ago still remain at the company’s facilities today.
Furthermore, as we move to a digital era, Iron Mountain has also expanded into the data center business. Its current range of services include information management, digital transformation, and cloud services—just to name a few.
Today, the company has more than 100 megawatts of global data center capacity, with the expansion potential of up to 285 megawatts. And by 2020, Iron Mountain’s data center business is expected to contribute to 10% of its total annual adjusted earnings before interest, tax, depreciation, and amortization (EBITDA).
Combining a high current payout with strong dividend growth potential, Iron Mountain Inc deserves to be near the top of every income investor’s watchlist.