In a world where smartphones listen to your conversations and send ads accordingly, what's the most powerful form of advertising? When it comes to people actually remembering ads, that would be billboards. According to Nielsen Reporting, 86% of viewers recall ads from billboards they pass, which significantly beats online ads (57%) and radio ads (46%).
That's good news for Lamar Advertising (LAMR +0.96%). Founded in 1902, the Baton Rouge, Louisiana-based $13.5 billion company is now the undisputed leader in outdoor advertising. Its approximately 360,000 displays in 45 states and Canada include over 159,000 billboards. Not only is that amount four times that of its nearest rival, it's more than the next 10 competitors combined.
NASDAQ: LAMR
Key Data Points
Lamar Advertising made headlines last August, when filings revealed that Berkshire Hathaway had invested $141.9 million in the company. Last quarter, it bought another 32,603 shares. What might Buffett, or his lieutenants Todd Combs and Ted Weschler, see in this stock?
A "wide and long-lasting moat"
Buffett has spoken of the importance of moats around businesses. The analogy describes a company that enjoys a stranglehold on a sector because of brand power, or efficient distribution, or high costs from switching services that discourage consumers from turning to competitors.
Lamar Advertising's ability to essentially corner the billboard market for so long suggests that it has a moat preventing competitors from claiming significant market share. In this case, it's the government.
The Highway Beautification Act of 1965 includes strict rules for billboards, regulating their size, spacing, lighting, locations, and positioning. It not only establishes national standards, but also requires billboards to be approved by state regulators. In fact, if states don't implement their own billboard-control programs, they are subject to a 10% loss in federal highway funding.
Image source: Getty Images.
It's almost always too onerous, and sometimes legally impossible, for competitors to place billboards too close to Lamar Advertising's 159,000 outposts. And because fast-food giants won't pass up the chance to share their nearest locations with tens of millions of drivers each day, Lamar Advertising earns steady revenue from a number of blue chip companies. Billboards generate 88% of Lamar Advertising's revenue, with interstate logo advertising and transit advertising making up the rest.
Lamar Advertising's clients include GEICO, Progressive Insurance, JPMorgan Chase, Coca-Cola, and Johnson & Johnson. And because local businesses and smaller chains need to advertise to highway drivers, too, its client base is highly diversified. No single customer accounts for more than 2% of its total revenue, so the company won't be rocked by the loss of any one client, no matter how large or famous.
The strength of its moat, and the advantages of its diverse mix of clients, can be seen in Lamar Advertising's resilience amid economic downturns.
In the economic crisis of 2008-2009, revenue dipped by only 11%. In 2020, when much of America and Canada was under lockdown, billboard real estate became less desirable. The company's annual revenue took a 10.8% hit that year. That's a blow, but not a catastrophe, especially since by 2022, the company was logging more revenue than ever.
Keep in mind that 2008-2009 was the most severe downturn since the Great Depression, and Lamar Advertising managed to grow revenue in more mild downturns like that of 2022. And last quarter, as payroll firms reported the economy losing jobs and consumers feeling pinched, Lamar Advertising still grew its acquisition-adjusted revenue by 2.9%.
So, is there anything to worry about?
As a real estate investment trust (REIT), Lamar Advertising is required by law to return 90% of its net income to shareholders as dividends. That means its yield, currently at 4.7%, is often the primary reason investors buy the stock. So a dividend cut can send shares cratering. In 2020, it had to cut its dividend in half, contributing to a sell-off of nearly 50%.
Lamar's price-to-earnings ratio of 29.5 is right in line with the S&P 500 as a whole. Its debt-to-equity ratio of 457% is perhaps concerning, since a ratio over 200% suggests that a company is overextended. However, Lamar Advertising is about to get some help from lower interest rates on this front, and the company is already refinancing to manage debt, including refinancing transactions totaling $1.1 billion completed last fall.
None of these issues are red flags, in my view. Given the stability of its business, its reasonable valuation, and its dividend yield that is almost four times greater than the S&P 500 average, I believe Lamar Advertising is a buy for investors prioritizing growth and income.
