Due to the ongoing macroeconomic disruptions and supply chain issues triggered by the now 2-year-old pandemic, the U.S. inflation rate accelerated to 8.5% year-over-year last month. Add in high geopolitical uncertainty and the fact that the Fed plans a series of interest rate hikes this year to bring inflation back in check, and it's perhaps not a shock that the tech-heavy Nasdaq Composite has fallen to 18% below the 52-week high it set in November.
Digital Realty Trust (DLR -0.17%) isn't even part of the Nasdaq Composite. But the real estate investment trust's (REIT) tech ties have dragged it down by 19% from the 52-week high it touched in December.
Has that sell-off made Digital Realty a buy?
The business is fundamentally sound
Digital Realty continued to produce great operating results in 2021.
The REIT increased its core funds from operations (FFO) by 5% to $6.53 per share in 2021. This growth was driven by a couple of factors. First, Digital Realty benefits from having annual cash rental rate increases of 2% to 4% built into its leases. Second, as President and Chief Financial Officer Andy Power noted during the company's most recent earnings call, it invested just under $2.2 billion in development capital expenditures last year.
A major player in an unstoppable industry
Digital Realty's results in 2021 weren't a fluke either. The REIT's operating fundamentals look like they will remain strong in the years ahead for a couple of reasons.
Increasing penetration rates of business cloud computing and emerging technologies like the Internet of Things bode well for the global data center industry. The analysts at Allied Market Research have forecast that the global data center industry will grow at a compound annual rate of 10.5% between 2020 and 2030, increasing in value from $187.4 billion to $517.2 billion.
Digital Realty's $41 billion market capitalization makes it one of the largest data center REITs in the world. With its size and scale, Digital Realty should greatly benefit from that expected data center industry growth. I expect it to average annual growth in core FFO per share of 5% to 6% over the long run.
Dividend growth should remain solid
Digital Realty also boasts a dividend that, at current share prices, yields 3.4% -- significantly higher than the S&P 500 index's 1.4% yield.
And with a dividend payout ratio that's forecast to be 71.2% in 2022, the REIT is retaining plenty of capital to finance data center development activity and acquisitions. This should fuel core FFO per share growth while allowing management to boost the dividend in line with core FFO.
This is why I'm forecasting 5% to 6% annual dividend growth in the years to come. Simply put, Digital Realty offers investors an attractive mix of immediate income and growth prospects.
The stock appears reasonably valued
Digital Realty is a quality REIT. But prospective investors looking to achieve market-beating total returns should always crunch the numbers in an effort to ensure that they don't materially overpay for a stock.
At its current price of around $145 per share, Digital Realty trades at a forward price-to-core-FFO-per-share ratio of 21.2. This is the REIT equivalent of a forward price-to-earnings ratio for the S&P 500, which is currently 18.8. Based on Digital Realty's exceptional track record of compound growth, this looks to be a sensible valuation for the stock.