The S&P 500 is barely 1% off of its all-time high, which can be good news or bad news depending on your perspective. On the one hand, investment portfolios have soared to record highs, boosting the wealth of those invested in equities. But on the other, it has pushed the S&P 500's dividend yield below 1.3%, making it harder for investors seeking steady income.
Fortunately, finding stocks that pay above-average dividends remains possible. One stock is the real estate investment trust (REIT) Iron Mountain (IRM 5.10%). Here are three reasons why.
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The business is growing
Iron Mountain derived about 65% of its revenue during the past 12 months from its storage business, which keeps confidential paper records for its customers. The remainder of the company's revenue was generated from its services business, which includes records management, secure shredding, data management, digital solutions, and data centers.
As a testament to Iron Mountain's leadership in its core business of storage, the company serves 225,000 customers, which includes about 95% of the Fortune 1000 companies.
Iron Mountain's strong brand is what led the company's adjusted funds from operations (AFFO) per share -- a key metric for REITs -- to grow 2% last year to $3.07, despite COVID-19's detrimental impact on many businesses during that time.
Although use of paper-record storage will likely gradually decline as digital storage becomes more widely adopted, Iron Mountain should continue to grow. This is because the company pivoted to data centers several years back to drive future growth, and the company's global data-center business through the first three quarters contributed more than 8% of adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA).
Thus far, it looks like Iron Mountain is doing a great job at leveraging its relationships with Fortune 1000 customers to meet their evolving storage needs.
As a result, Iron Mountain forecasts that revenue this year will increase 7.5% from 2020 to about $4.47 billion, the midpoint of its projections. And the company also believes that its AFFO per share for this year will surge 10% from the previous year to about $3.39, also the midpoint of its projections.
A well-covered dividend
A growing business is critical to a company's mission of paying a steady dividend. But that's only one piece of the puzzle. It's equally important that a REIT has more than enough cash from AFFO per share to maintain its dividend.
Iron Mountain passes this test as well, demonstrated by the fact its AFFO per share payout ratio for this year will be 73%, based on the projected $3.39 AFFO per share figure. This prudent payout ratio serves two functions. First, it gives Iron Mountain a cushion to withstand any temporary downturns in its business. Second, this allows the company to retain the capital necessary to expand its data-center business even as it rewards shareholders.
The balance sheet is in fair condition
The third reason that income investors should be able to rely on Iron Mountain's dividend is that its balance sheet is doing just fine compared to other REITs.
For instance, Iron Mountain's net lease adjusted leverage ratio (calculated as net debt divided by adjusted EBITDA) was 5.4 in the third quarter. Furthermore, the company said it expects this ratio will be 5.3 for this entire year. This is within the company's long-term target leverage ratio of 4.5 to 5.5, which demonstrates that management remains disciplined in its use of debt.
For context, Iron Mountain's leverage ratio was better than the J.P. Morgan REIT Composite average of 6.1 in the third quarter. Iron Mountain also stacks up well against its larger competitor, Digital Realty Trust, which had a leverage ratio of 6 in the third quarter.
An undervalued stock
Overall, Iron Mountain is a legitimate income stock that yield-hungry investors can confidently put into their portfolios.
The market doesn't appear to be showing Iron Mountain's stock much respect, even though its fundamentals are strong. Investors looking to lock in Iron Mountain's 5% dividend yield can do so at an AFFO per share multiple of less than 15. This is well below Digital Realty Trust's price to core FFO multiple of nearly 26. Even though Iron Mountain isn't a pure data-center REIT like Digital Realty Trust, it's heading in the right direction and therefore, deserves a higher valuation multiple.
