The effects of compounding have been vocalized by countless, however, Warren Buffett seems to be synonymous with the term. Over the years, Oracle of Omaha is always reminding the importance of reinvesting interest and dividends.
In a letter in 1963 to partners, the Oracle himself discussed the investment decision by Queen Isabella to fund Christopher Columbus' expedition to find a new, shorter, route to Asia. He was quoted saying, "Aside from the psychic income associated with discovering the New World, it wasn't exactly another IBM." Keep in mind during that era, IBM was performing well. Crunching a few numbers, he calculated that had she opted to invest that $30k at 4%, in today's money, it would be worth over $7 Trillion.
A common misunderstanding about "compounding" is exactly how it works. Compounding requires immense patience. The prolific effects of this phenomena are found on the back end, not the front. A good comparison would be a snowball rolling down a hill. At first, it starts out slow (base amount), but as more mass (dividends) is gained (more shares), the faster the snowball rolls (compounds). An investor purchasing shares in a "wonderful company at a fair price", ideally, would not have to ever sell shares *Knock on wood*, thus over the course of 20, 30 years, what began as a modest investment grows into a sizable nest egg.
Source: Google Images
Having said that, an important aspect of diversification in a portfolio is Real Estate, i.e. REIT's. To me, I see real estate is an integral part as there is only so much real estate in the world. God is not creating more of it. For investors, REIT's often result in high yields, and a source of stable income, "coupon clipper". More so, real estate, in some circumstances, offers a more conservative way for investors to capitalize on economic/societal trends and tailwinds.
This piece is highlighting three REIT's that over the course of many years, investors can see multiples on their original investment due to the application of DRIP, Dividend Reinvestment Plan, or simply known as 'Reinvesting". Company's selected exhibit following characteristics:
- riding hefty economic tailwinds;
- juicy yields with a history of dividend growth;
- and strong financials (including stout balance sheets).
The culmination of such attributes leaves investors better suited to witness their hard-earned money blossom over the course of many years. The sustainable higher yields mean more income for investors which accelerates the effects felt via compounding, as more shares are able to be purchased at each reinvestment point... given all else equal.
The Billionaire Approved - 5G Player
One of the three main players in the Wireless Cell-Tower sector is Crown Castle (CCI). CCI engages in accumulating wireless infrastructure assets, cell phone towers (~40k) and fiber (~65k miles), and leases these assets under long-term contracts phone and internet companies. The company has an average of 5 years remaining on contracts with tenants that include the likes of AT&T (T), Verizon (VZ), T-Mobile (TMUS), and Sprint (S).
Crown Castle has incurred remarkable growth over the years as the wireless industry has evolved. The change from 3G to 4G, aka LTE, sparked the beginning of immense growth for Crown Castle as the number of connected devices and amount of data used skyrocketed. The industry is in the early stages of rolling out 5G which will support everything from smart street lamps and traffic lights to everyday household devices. However, in order to achieve this, more and more wireless towers are needed.
For Crown Castle, this is music to their ears. On one tower, the company can accommodate more than one carrier. In these circumstances, the costs for CCI are relatively flat for adding carriers, however, the yield or return on that individual tower is multiplied. Essentially, the more carriers on one tower, the more cash flow generated with almost no additional costs after the first tenant. This allows the company to generate very strong cash flow which supports their expansion and dividend growth.
Furthermore, Crown Castle boasts a very strong balance sheet with strong liquidity of nearly $5B, thanks to a $4.4B revolver and $288M in cash. On the liability side of the equation, the company carries $17.5B in Long-Term debt. Given their Last Quarter Annualized (LQA) Adjusted EBITDA of $3.4B, this comes out to a Net Debt-to-LQA Adjusted EBITDA ratio of 5.0x. Typically, this figure is considered to be relatively high, however, for a company CCI, the returns generated are so strong that they are able to lever up a little more. That takes into account adding more than one customer to a tower as well as the predictable cash flow from long-term contracts. Additionally, the company's debt is 84% fixed rate.
Currently, Crown Castle sports a 3.32% yield, which nothing to complain about. The company increased their dividend in Q4'18 by 7% to $1.125 per share per quarter. Based on the current FFO guidance midpoint of $5.69 for FY'19 and annualizing their last dividend of $1.125, we arrive at a payout ratio of 79%. At that ratio, the company has room to grow it but the company is more focused on expanding their operations to gain market share with the impending 5G rollout.
*The primary axis should not be in percent, there is a glitch, it's in dollars*
This AT&T spinoff has already generated remarkable returns for shareholders, yet when you analyze their operations, and balance sheet, and tailwinds it is easy to see that Crown Castle is deemed to continue producing outsized returns for investors in the form of dividend growth and appreciation. Maybe this is why Bill Gates owns 5.332M shares or $682M worth of Crown Castle stock. I am not the only one that sees the great things this company is doing.
Will Data Ever Stop Growing?
No. Each second, everything that goes on creates more data. But where is data stored? The answer is servers. More specifically, companies own massive data centers full of servers that just store data. For REIT's this means the ownership of these properties and leasing space to clients. A favorite is CyrusOne (CONE). CyrusOne owns and operates 49 data centers totaling 7.1M Net Rentable Square Feet, or "NRSF", spread across the United States, England, Singapore, and Germany with joint ventures in South America. The company's success lies in their meticulously crafted expansion plan, which has paid dividends in the form of strong underlying financials and growth. Currently, the company houses data for around 1,000 customers of which 210 are in the Fortune 1000.
Looking at the chart above, it is obvious that CONE has done a tremendous job growing their top-line, FFO, and EBITDA. Much of this can be attributed to their continuous development of new properties in key markets, including global markets such as London, and Frankfurt. Furthermore, their revenues and cash flows are recurring as customers are locked into contracts, with an average of 4.5 years remaining. Additionally, 73% of their contracts have escalators.
The company has a robust development program that constructs centers using a "modular" approach, permitting the company to complete projects much quicker and cost-effective. The company currently has a pipeline of 1.1M NRSF and 55MW of power capacity. One such project is their third data center in Frankfurt that just broke ground.
The company is primed to benefit from the explosion in data consumption from 5G, but also through added technology and devices. Everything from enterprise data to consumer data is kept and stored. The amount of data will continue to grow. It is expected that by 2025, there will be 463 exabytes of data created each day. To put that into perspective, that is the equivalent of 212,765,957 DVDs per day. The need for digital data storage will always persist due to the ever-increasing amount of applications, activities, everything. Everything is data.
As for their balance sheet, CyrusOne carries about $2.7B in Long-Term debt. On the plus side, there are not any significant maturities until 2023, which allows for some financial flexibility. My readers know I am all for prepaying some debt if possible. Their position is bolstered by $1.41B in available liquidity, per the company's Q2'19 earnings presentation. Considering last quarter Adj. EBITDA of $127.3M and annualizing it to $509.2M, we get a Net Debt-to-LQA Adjusted EBITDA ratio of 5.1x. Though it is slightly higher than peers, the company continues expanding operations nicely. A slight decrease in the ratio is anticipated as the company monetized a portion of their investment in GDS Holdings (GDS), a data center company in China. The company sold 5.7M shares for about $200M. Strong Adj. EBITDA growth should aid as well, but marginally.
Turning to CONE's dividend, currently, the company boasts a yield of 2.96%, which is not all that high for a REIT. It is not for a lack of dividend growth, as evidenced in the above graphic. Nonetheless, CyrusOne has rewarded and will continue shareholders with healthy dividend increases and appreciation. In fact, Q3'19 dividend was upped 9% to $0.50 from $0.46 per share. Using the midpoint from their FY'19 guidance on FFO of $3.55 per share, and an annual dividend of $1.92, assuming Q4'19 dividend of also $0.50, we get an FFO payout ratio of 54%. This figure is on the lower end of management's desired payout range of 50%-60% of FFO. Regardless of the range, 54% is a low payout ratio, leaving management plenty of room to grow the dividend. However, the company is focused on reinvesting into their business to capitalize on this opportunity. Apparently, it has worked as their stock price is up 148.7% over the past 5 years. Over the last year, it is down a mere 4.6%.
In the long-run, CyrusOne should continue to perform as a deep pipeline including international markets, coupled with prudent financial management will allow the company to capitalize on the growing boom of data around the world. In turn, this success should trickle down to investors in the form of substantial price appreciation and dividend growth.
Slow and Steady Win the Race
Last, but certainly not least, we have one of the largest billboard owners in the country and a REIT I have been high on for several years, Lamar Advertising (LAMR). Lamar Advertising leases space on Billboards, buses, shelters, logo plates, and airport terminals under contracts with durations typically between one to twelve months. The majority of their revenue is leasing space on their 156,900 static and digital roadside billboards across 45 states and Canada.
For starters, calling Lamar Advertising a company growing explosively, would be quite an overstatement. Rather they approach growth my preferred method, controlled and methodical, as it is more sustainable over the long-term. We are long-term investors... see the parallel there? As evidenced above, LAMR has continually grown their top-line and FFO. Not on the chart is Adjusted EBITDA, which has grown in lockstep with the others. Cash Flow wise, this business is a bloody CASH COW! LAMR generates robust FCF as CAPEX is minimal. Their consistent growth has been the result of expanding their Billboards segment, but also diversifying revenue and cash flow streams to buses, shelters, etc.
Source: Lamar Advertising Website
When it comes to advertising, they think online ads, television ads, but a lot forget about billboards and other outdoor advertisements. Companies such as Google (GOOG) (GOOGL), Facebook (FB), Amazon (AMZN), among others. However, an overlooked company like Lamar Advertising has also been a prime winner. As more and more individuals take to the roads, which has partially been boosted by low gas prices, Lamar is right there profiting on it. It is all about scale. On July 16, LAMR announced the acquisition of Ashby Street Outdoor, adding 1,908 outdoor advertising displays in Arkansas, Kansas, Oklahoma, and Missouri. The more people that view one each billboard, the better as it can lead to a higher influence rate. In turn, LAMR can charge more. I am positive you have seen at least one Billboard owned by Lamar, probably many more, but never realized it.
Turning to their Balance Sheet, as of Q1'19, the company had a mere $32M in cash. On the flip side, there was $2.826B in Long-Term debt. Using Q1'19 Adjusted EBITDA of $146M and annualizing that to $584M, we get a Net Debt-to-LQA Adjusted EBITDA of 4.78x. Just as with Crown Castle, Lamar's Cash Flow generation is impressive and robust, which provides them with incredible flexibility, including the option to have more debt. Management runs a financially disciplined and conservative ship, so leverage might not reach 5x. If anything, leverage will decrease slightly. Additionally, the company has an Interest Coverage ratio of 3.5x. Lamar's steady growth has resulted in lower leverage than aiming for explosive growth. Management understands the importance of not growing beyond one's means.
As for LAMR's dividend, the firm sports a healthy 4.82% yield. That is not to say price appreciation has not occurred, because it has. Management has raised their dividend every year since 2015, according to Dividend.com. The dividend was hiked in Q1'19 to $0.96 per share/quarter from $0.92, or a 5.49% jump. Although modest this time around, the company had also increased the dividend in Q'18 and Q4'18. This exemplifies management's confidence in the company's operational success, as well as prospects that they can afford to be a little more giving and still have enough to reinvest. The company does not provide guidance, however, last quarter's FFO was $105M, if we assume full-year FFO of around $430M, implying a little growth each quarter, and a dividend of $3.84 per share, we get an FFO payout ratio of 89%. With that being said, the likelihood that management ups the dividend again this year is pretty low. On the contrary, I am certain that management will continue their annual dividend increases. For long-term and dividend growth investors, it does not get much better than Lamar Advertising when accounting for financials, business model, economics, and dividend.
The application of reinvesting dividends from high-quality companies is a proven strategy. The problem most people have is being able to stay patient. Investing in companies that keep it simple and generate consistently strong and growing cash flows that support dividend growth and growth initiatives helps an investor stay in that name longer. You invest in your "circle of competence". Crown Castle, CyrusOne, and Lamar Advertising all exemplify investments that offer investors the chance to multiply their nest egg through exposure to stable and growing income, long-term trends, all while maintaining financial prudence.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.