Iron Mountain: 5% Yield, Strong Q3 '21 Growth
Summary
- IRM yields 5.27%, with an improved 77% AFFO payout ratio.
- It has outperformed its sector, sub-sector and the market over the past year, month, and in 2021.
- Valuations, profitability, debt and price targets are covered in this article.
- Looking for more investing ideas like this one? Get them exclusively at Hidden Dividend Stocks Plus. Learn More »
NatchaS/iStock via Getty Images
If you're looking for tech-related dividends, there may be one high dividend stock which is hiding under a mountain.
From Mushrooms To Mountains:
Iron Mountain (NYSE:IRM) was founded by Herman Knaust. In 1936, he "bought the original Iron Mountain site - a depleted iron ore mine with 100 acres of land - where he started a mushroom farm.
Knaust’s decision in 1945 to sponsor the relocation of many Jewish immigrants - who lost identities via missing personal records during WWII - into the United States is what spurred the idea to start protecting vital information from wars or other disasters in his mines." (IRM site)
Traditionally known as a records storage REIT, IRM has been investing in the growing data center industry and has expanded its data center holdings to 15 facilities in three continents since 2017. Although its data center operations still only account for ~10% of company revenue, they continued to be a bright spot, growing 21.7% in Q3 '21 vs. Q3 '20, with an Adjusted EBITDA margin of 40%.
IRM booked 9 megawatts in the third quarter and 22 megawatts year-to-date. It also expanded into India in 2021 with its Web Werks JV. Management expects to exceed its full-year guidance of 30 megawatts.
As of 9/30/21, IRM had ~145MW booked, but there's a much larger 446MW total capacity in its data center portfolio:
(IRM site)
Storage revenue comprises 64% of IRM's total revenue, with the 36% balance coming from its Service businesses. Records management remains IRM's largest business, accounting for 73% of storage business, followed by data management, at 12%. It's also the largest category in IRM's service mix, accounting for 43%, followed by shredding, at 24%, and global digital solutions, at 18%:
(IRM site)
The long-time bear argument vs. IRM has been that digitization would kill its record storage business, but you couldn't prove that by IRM's volume, which continued to expand, as of Q2 '21. One key fact gives IRM's world-leading storage business big support - government and business entities are required to maintain records for many years.
IRM has a 98% customer retention rate, with records remaining in storage an average of 15 years. It serves 95% of the Fortune 1000 companies, with customers from over 50 different industries.
(IRM site)
Earnings:
IRM had a strong Q3 '21: While storage revenue grew 3% in Q3 '21, Service revenue jumped 21% year-over-year. Net Income rose 77%, while Adjusted EBITDA grew 11%. AFFO and AFFO/share rose 22% and 21%, respectively:
(IRM site)
IRM has had strong growth so far in 2021, with double-digit gains in Service Revenue, NFFO, and NFFO/Share. Adjusted EBITDA rose 9.36%, while AFFO rose ~7%, and AFFO/share rose 5.8%:
Part of management's strategy is to recycle capital, via sales of non-core assets - they sold five London facilities for $215M in sale-leasebacks:
(IRM site)
Another ongoing part of management's strategy is its Project Summit, which they expect to deliver $375M in annual run-rate benefits exiting 2021.
2021 Guidance:
Management previously raised its full-year 2021 guidance, which they reaffirmed on the Q3 '21 release. EBITDA is expected to grow by 7%-11%; AFFO by 8%-13%, and AFFO/Share by 7%-12%. Revenue is expected to grow by 5%-9%:
(IRM site)
IRM has had major growth over the past year in its business across a number of governmental agencies, as management noted on the Q3 call: "This growth is due not only to the residents that our products are having with the government and assisting them on their own transformation paths but also to the work our government team has done in partnership with the likes of General Dynamics. This partnership is already resulting in a three-year Iron Mountain contract worth $23 million to help the Department of Veteran's Affairs with their digital transformation in order to serve better our U.S. soldiers."
Profitability and Leverage:
IRM's ROA and ROE profitability have grown considerably vs. its pre-pandemic figures, while its EBITDA margin has moved slightly higher. Its debt leverage figures have improved a bit, with net debt/EBITDA down to 5.56X, and debt/equity down to 7.73X.
An issue when analyzing IRM is that there's a lack of meaningful direct competitors for its main storage business. We added these specialty REIT averages here and in the Valuations and Performance tables, but take them with a grain of salt, since this sub-sector is a hodge-podge that includes everything from casino REITs to Timber to Cell towers.
Management shows IRM's Net Lease leverage as 5.5X, excluding $260M of proceeds from a Q4 '20 sale leaseback transaction, a bit lower than the NAREIT average of 6.2X:
(IRM site)
As of 9/30/21, IRM had $2.1 billion of liquidity, 86% of which was at a fixed rate, with a 7.61 years weighted-average maturity.
Performance:
IRM has outperformed its sector, sub-sector and the market over the past year, month, and in 2021, while lagging over the past quarter.
Analysts' Price Targets:
Since we last covered IRM in August, analysts' average price target has risen by 21.6%, to $46.57, while the highest price target is up by 16%, to $56.00.
At $46.92, IRM is slightly higher than the average price target, and 16% below the $56.00 highest target.
Valuations:
Despite its outperformance over the past year, IRM looks a bit undervalued on a P/AFFO, P/Sales, and EV/EBITDA basis, whereas its P/Book is much higher than the Specialty REIT average. Data Center REITs have a 2021 P/FFO of 23.82X.
Dividends:
At $46.92, IRM yields 5.27%. Management already declared the December quarterly dividend, which goes ex-dividend on 12/14/21, with a 1/6/22 pay date. Management has kept the quarterly dividend at $.6185 since Q4 '19, resulting in a five-year average dividend growth rate of 5.34%:
With AFFO/Share improving by 5.8% in Q1-3 '21, and the dividend/share remaining flat, IRM's AFFO/dividend payout ratio has improved by 5.5%, dropping to 72.48%, with a trailing figure of 77%:
Parting Thoughts:
Like many of the other high yield dividend stocks we cover in our articles, IRM has come back strong from the March 2020 COVID Crash when it fell to the low $20s. There have been a few subsequent pullbacks, with the most recent being in Sept-Oct., when it pulled back from ~$49.0 to ~$43.00.
IRM could be a good company to add to your dividend stock watch list, while you wait for the next market hissy fit.
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This article was written by
Robert Hauver, MBA, aka “Double Dividend Stocks” was VP of Finance for an industry-leading corporation for 18 years and has been investing for more than 30 years. He focuses on undercovered and undervalued income vehicles and he leads the investing group Hidden Dividend Stocks Plus.
With Hidden Dividend Stocks Plus he scours the world's markets to find solid income opportunities with dividend yields ranging from 5% to 10% or more, backed by strong earnings. Features include: a portfolio with up to 40 holdings at a time including links to associated articles, a dividend calendar, weekly research articles, exclusive ideas, and trade alerts. Learn More.
Analyst’s Disclosure: I/we have a beneficial long position in the shares of IRM either through stock ownership, options, or other derivatives. 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.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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