Digital Realty Trust (DLR +0.17%) is for long-term investors who want a steady source of income from a company in an important and growing industry. In a nutshell, the company rents out space within its data centers so other organizations that need data processing capabilities but don't want to pay to build their own facility can access computing power. From the profits the company earns, it pays a dividend to its shareholders, which is currently $4.32 -- or a yield of 3.5%.
The company has consistently increased its dividends for the past 14 years. While this is one indication of good management, the question investors should be asking today is whether or not they can expect the company to continue increasing payouts.
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Market Share and Cost Controls
Digital Realty is a giant in the data center world. It controls 20.5% of the global market share, and it boasts well-known clients such as Apple, Google, and Microsoft. Controlling over 20% of a $31 billion dollar market (2018 number) is expensive. One of the reasons I like Digital Realty Trust is that it is taking steps to reduce its costs. In 2018, Digital Realty was able to negotiate long term rates for its Chicago data centers and save 20% on its electricity rates.
The company participates in a program organized by the Environmental Protection Agency called the Green Power Program. Participating companies agree to buy some of their energy from renewable energy sources. Currently, in the United States, 75% of coal-produced electricity costs more than renewable energy. Participation in the Green Energy Program enables Digital Realty to potentially lower its operational costs even more.
Positioning for a Recession
Digital Realty Trust is well-positioned to continue to grow and weather a recession. The company managed to grow earnings and revenue in the 2008 recession, and it has seen steady growth for the past 15 years, which speaks well of its organizational culture and the ability of its senior leadership to think long-term.
Let's keep in mind the core services Digital Realty offers. Businesses can't afford to take down their websites to cut costs. What would Google's business model be if it didn't have the servers to power its search engines? Companies can't revert to pen and paper and shut down their internal computer networks. The general public won't stop using social media sites or accessing digital media. Given Digital Realty's critical role in communications infrastructure, it's unlikely Digital Realty's customers will end their contracts.
Latin American Market
In December 2018, the company finished its purchase of Brazilian company Ascenty. The acquisition of Ascenty was a solid strategic decision on the part of Digital Realty's management team because it increased their presence in Latin America.
Latin America is the next frontier for data center operators. Throughout the region, there are booming technology sectors that are eager to purchase data center services. Cell phone and internet connectivity rates are also increasing, meaning there is higher demand for data. To give you an idea of the scope of the opportunities, as part of smart cities initiatives, Brazil's Rede Cidade Digital is working to provide broadband to over 300 municipalities. Chile and Mexico have launched similar broadband initiatives, too.
Edge Computing
Even though the company is already a dominant player in the data center market, there is still plenty of room for it to grow. In an April 2018 interview with CAPRE, Jack Funchion, Director of Sales Northeast, noted Digital Realty was well-positioned to take advantage of trends in edge computing. Edge computing is a cool word for decentralized servers.
Edge computing is the next frontier and Digital Realty is at the forefront of this trend. This bodes well for their ability to increase earnings and dividends.
Digital Realty Trust is a stable income-producing stock with a track record of increasing dividends for over a decade. It's worth a second look for investors that are risk-averse and want a steady income stream. It's not as flashy as other stocks as it won't make nightly business news headlines with announcements of fancy gadgets, but the stock works hard for your money.
