Iron Mountain: Buy This Blue Chip Stock To Boost Your Passive Income
Summary
- Iron Mountain's dividend payout ratio should fall from the mid-60% range in 2022 to the low-60% range in 2023.
- The REIT's total revenue and AFFO per share soared higher in 2022.
- My assumptions into the discounted cash flows model and dividend discount model demonstrate the stock to be 6% undervalued.
- Iron Mountain's stock could deliver double-digit annual total returns with its 4.7% dividend yield and mid-single-digit annual AFFO per share growth potential.
Young couple backpack up a mountain summit. AscentXmedia
Building a successful dividend stock portfolio is no different than two people climbing a mountain. Little by little, step by step, you and your partner reach the mountain summit: It simply doesn't happen overnight.
The same can be said of you and your dividend stock portfolio. Every time you deploy more capital to your portfolio, reinvest those dividends and receive payout raises, you are one step closer to the summit of financial freedom.
In that same vein, Iron Mountain (NYSE:IRM) could be a great stock around which income investors can build their portfolios. Let's take a closer look at the company's fundamentals and valuation to better understand why this is the case.
The Dividend Is Well-Covered
Iron Mountain’s 4.7% dividend yield is nearly triple the S&P 500 index’s 1.7% yield. For more context, the stock’s yield is 100-plus basis points higher than the 3.5% average yield of publicly traded U.S. equity real estate investment trusts as of a few weeks ago.
Yet, income investors need not worry very much about the sustainability of the payout moving forward. Iron Mountain generated $3.80 in adjusted funds from operations per share in 2022. Against the $2.47 in dividends per share that were paid during that time, this equates to a 65.1% AFFO per share payout ratio.
This is at the high end of Iron Mountain’s target AFFO per share payout ratio of the low to mid-60% range (info sourced from slide 53 of 70 of Iron Mountain September 2022 Investor Presentation). And with the company anticipating a midpoint AFFO per share of $3.96 in 2023, the AFFO payout ratio will come down further. This is especially the case with the dividend obligation likely set to remain at $2.47 for one more year, which should result in a 62.6% AFFO per share payout ratio for 2023.
Such a payout ratio would be well within the company’s targeted range. Thus, annual dividend growth in 2024 and beyond will largely move in line with or slightly ahead of AFFO per share growth. That’s why I believe that Iron Mountain can deliver 5% annual dividend growth over the long run after this year. This is arguably a reasonable expectation for dividend growth considering how much capital the company is now retaining for growth, which is starting to be reflected in its results since my prior article in August 2020.
Iron Mountain Keeps On Growing
Iron Mountain Q4 2022 Earnings Press Release
Since shifting its focus toward data centers years ago and lowering its AFFO payout ratio from a staggering 81% in 2019, Iron Mountain has reinvented itself. What was once no more than a stale and stagnant income stock is now a hybrid: That is, a blend of an income stock and a growth stock (payout ratio according to slide 53 of 70 of Iron Mountain September 2022 Investor Presentation).
Iron Mountain's total revenue surged 13.6% higher year over year to $5.1 billion in 2022. If that wasn't impressive enough, the company's results were even better when accounting for unfavorable foreign currency translation stemming from its international operations and a robust U.S. dollar. Factoring in neutral currency, Iron Mountain's total revenue was up 17% for 2022.
The company's core business of records storage rental remained remarkably predictable, with revenue advancing 5.7% during the year to $3 billion. But just as it has been for years, the bigger story was Iron Mountain's service revenue. This revenue source, which includes data centers, rocketed upward by 27.7% in 2022 to $2.1 billion.
Moving down to the bottom line, Iron Mountain's AFFO per share increased by 9.2% over the year-ago period to $3.80 for 2022. Looking at the current year, the company is forecasting AFFO per share of $3.91 to $4 during 2023. Needless to say in this uncertain economic environment, the guidance of mid-single-digit AFFO per share growth on Iron Mountain's end is respectable (all details in the previous three paragraphs per pages 1-2 of 15 of Iron Mountain Q4 2022 earnings press release).
Risks To Consider:
As encouraging as Iron Mountain's guidance is, there are still risks surrounding investment in the company.
The risk of the U.S. experiencing a recession by the end of this year is currently estimated at 64%. Maybe that turns out to be wrong. But it could also turn out to be right. Depending on the severity of the recession, Iron Mountain could have difficulty collecting revenue from customers operating in industries that are more sensitive to an economic downturn. The company already seems to be baking a recession into its guidance for this year. However, it is worth noting that a worse-than-expected recession could manifest itself and end up sinking Iron Mountain's guidance in the near term.
A Slightly Discounted Valuation
Iron Mountain is a quality business. But investors still need to be careful not to overpay if they expect to do well on their investment. That's why I will discuss two valuation models to assess the fair value of the stock.
Money Chimp
The first valuation model that I'll use to value Iron Mountain's shares is the discounted cash flows model or DCF model. This valuation model has three inputs.
The first input into the DCF model is trailing-12-months adjusted funds from operations per share. Iron Mountain's TTM AFFO per share is $3.80.
The next input for the DCF model is growth. I will assume 4% annual AFFO per share growth over the next five years and deceleration to 3.5% annually thereafter.
The final input into the DCF model is the discount rate. This is just another way of saying the required annual total return rate. My personal preference is 10%, so I will use that as the assumption.
Plugging these inputs into the DCF model, I get a fair value of $61.82 a share. That means that shares of Iron Mountain are trading at a 15.6% discount to fair value and offer an 18.4% upside from the current price of $52.20 a share (as of April 7, 2023).
Investopedia
The second valuation model that I will utilize to appraise Iron Mountain's shares is the dividend discount model. This also consists of three inputs.
The first input for the DDM is the expected dividend per share, which is the annualized dividend per share. That amount is $2.474 in the case of Iron Mountain.
The second input into the DDM is the cost of capital equity, which is another term for the annual total return rate required by an investor. I will again use 10%.
The third input for the DDM is the DGR or annual dividend growth rate. As I discussed earlier, I will use 5% for this input.
Using these inputs, I arrive at a fair value output of $49.48 a share. This implies that shares of Iron Mountain are priced at a 5.5% premium to fair value and pose a 5.2% capital depreciation from the current share price.
When I average these two fair values together, I get a fair value output of $55.65 a share. That suggests Iron Mountain's shares are trading at a 6.2% discount to fair value and can provide a 6.6% upside from the current share price.
Summary: A Market-Crushing Dividend And Moderate Growth Potential
Iron Mountain offers yield-focused investors a level of starting income that is difficult to resist. And given the trajectory of the company's AFFO per share payout ratio, this above-average income is sustainable. Coupled with the prospects of mid-single-digit annual AFFO per share growth potential, this should translate into healthy dividend growth.
And Iron Mountain's valuation seals the deal to make the stock a buy: My variables for the DCF model and DDM put the stock at a 6% discount to fair value. Investors seeking a balance between income and growth can find it in Iron Mountain's stock.
This article was written by
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.
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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Comments (16)
Thanks for sharing.
