During my conversation in early April with Jack Leslie -- 25-year industry veteran and current high-yield and dividend fund manager for Miller/Howard Investments -- I finished with the following question: Is there a company out there today that embodies what you look for in a great dividend stock?
Without hesitation, Leslie named Lamar Advertising (NASDAQ:LAMR).
Lamar Advertising has been in operation since 1902, but it recently converted into a real estate investment trust, REIT, this past November. The company is one of the largest outdoor advertising companies, and it leases space on billboards, buses, shelters, and benches to national and local businesses. Currently, the company owns 144,000 billboards, 2,100 digital billboards, and 41,000 transit displays.
Leslie suggested that there are three reasons the company is a great buy today:
- High current income
- Growth of income
- Financial strength
High current income
Leslie focuses on companies that pay big dividends, or return higher levels of income to shareholders. This allows him to reinvest dividends and take advantage of the power of compounding interest. Currently sporting a sizable 4.5% yield, Lamar Advertising certainly fits the bill.
However, no dividend is guaranteed, so you need a company that can create consistent income to support dividend payments. Leslie suggested, "We love subscription models. We like the idea that somebody is going to write [the company] a check every month." By leasing businesses advertising space -- which requires those businesses to write them a check every week or month -- Lamar Advertising is a great example of a subscription business model in action.
Most important, because of the highway beautification act of 1965, there are regulations for where and how many billboards can go up in certain areas. This limits new supply and makes Lamar Advertising's established portfolio of advertising permits a significant advantage over the competition. It also helps to keep the company's earnings more consistent.
Growth of income
Along with the ability to create earnings today, Leslie believes Lamar Advertising will be able to increase its dividend over time. This is important not only because a bigger dividend means more cash for investors, but because, as earnings and dividends grow, the stock price should follow over time.
There is one big reason to believe Lamar Advertising will be able to grow earnings. Over the last five years, the company has nearly doubled its digital billboards -- from 1,200 to 2,100 -- and according to CEO Sean Reilly during the company's fourth-quarter 2014 conference call, "We're budgeting 150 to 175 new digital units for 2015."
These assets are more expensive to acquire and maintain, but because they offer tenants more unique signage, the signs are more eye-catching, and companies have the ability to changes their message more simply, demand from businesses has been strong. Moreover, each sign can advertise several tenants, and here's the biggie, digital billboards create roughly 10 times the revenue per display compared to traditional billboards. Ultimately, they are well worth the up-front costs and should help to drive future growth.
Earnings and potential growth are important, but as Leslie reminded us, dividends are paid last. That means before a company can even considering paying a dividend, it needs to pay employees, expenses, and service their debt.
In particular, high levels of short-term obligations like debt can place an immediate cash burden on a company -- and put its financial health at risk.
As you can see, the vast majority of Lamar Advertising's debt is due after five years, and with the company generating about $280 million in operating income in 2014 -- also called EBIT, or earnings before interest on debt and taxes -- it is earning about two-and-a-half times what it owes in debt in any one year over the next several years. This gives the company wiggle room if earnings fall.
A simple approach
Since 1991, Miller/Howard investments has been taking a very simple, but effective, approach: Find stocks that can generate high levels of current income, can grow their dividend over time, and have the financial strength to support their earnings and dividends.
Lamar Advertising meets the criteria, and that is why it is a great buy today.
Dave Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.