Tech stocks have been hit hard in 2022 for a number of reasons, including soaring interest rates and fears of a recession. This is why the Nasdaq Composite has plunged 34% year to date.
Down 42% in 2022, shares of the data center real estate investment trust (REIT) known as Digital Realty Trust (DLR 0.95%) have been lumped into the tech sell-off. This has arguably led the stock to be a no-brainer buy for both income investors and value investors. Let's examine Digital Realty's fundamentals and valuation to better understand why.
A leader in an unstoppable industry
Individuals today now have access to computers (i.e., smartphones and laptops) that are more powerful than the supercomputers of just a few decades ago. And this is all made possible by data centers. Data centers process and store data and connect devices. Without this digital infrastructure, it would be impossible for all of us to play games, text, read articles like this one, and check emails.
And Digital Realty's more than 300 highly reliable data centers around the world are powering the modern world. Given the rising ubiquity of emerging technologies such as virtual reality, the outlook is especially encouraging. This is why analysts project that the global data center market will compound at 5% annually from $321.4 billion in 2022 to $410.4 billion by 2027.
As data consumption increases, Digital Realty will build more data centers. The company anticipates that its leased megawatts (MW) will grow 10% each year from 14,446 in 2022 to 21,071 by 2026. In fact, Digital Realty's funds from operations (FFO) per share should grow somewhere around the mid-to-high-single digits annually for the foreseeable future.
Image source: Getty Images.
The near 5% yield is well covered
Digital Realty's 4.8% dividend yield is almost triple the S&P 500 index's 1.7% yield. With such a high yield, it's often savvy to be skeptical of the dividend's safety. Fortunately, Digital Realty's dividend appears to be quite safe.
This is because the company's dividend-payout ratio should come in at around 72.6% in 2022. Such a manageable payout ratio has two benefits: It leaves Digital Realty with more than enough capital to construct more data centers and propel FFO per share higher over time. And it also builds a margin of safety into the dividend in the event that the company's FFO per share experiences a temporary drop. This is why I think it's reasonable to expect annual dividend growth of around 5% to 6%, which is an attractive mix of starting income and future income.
Exciting growth opportunities at a boring valuation
Digital Realty combines the excitement of technology with the stability of real estate. As alluded to earlier, this has been a double-edged sword for the stock in 2022. But income investors can use this volatility to their advantage.
That's because the stock's forward price-to-FFO-per-share ratio is just 15.1. If that wasn't enough, Digital Realty's trailing 12-month (TTM) dividend yield of 4.8% is well above the 10-year median TTM yield of 3.6%. This deep undervaluation is precisely why analysts have a 12-month price target of $125, which would represent 24% upside from the current $101 share price. That's what makes Digital Realty such a compelling buy for 2023 and well beyond.
