Disasters can delay the posts here at Cash Chronicles but they can’t stop them. Sorry about the one day late post, but the show will go on.
When it comes to investing there is something about dividends that really seems to touch a psychological nerve in people.The idea of an explicit, cash payment for investing in a stock is a comforting feeling.
In addition, the information on dividends is readily available and comparable between stocks. This makes the dividend yield one of the simplest and most intuitive comparisons between stocks. The pervading theory is that dividends are for relatively mature companies that don’t have sufficient growth opportunities to invest in to justify keeping the profits from shareholders. I think the promise of a guaranteed payment from an established company in the short term gives a lot of people mental comfort, as opposed to the more fuzzy, less explicit capital return one gets when share prices rise.
Due to this, there has grown a strong following of investors, especially those that are retired or about to retire, that build portfolios of dividend paying stocks. REITs, which usually tend to pay out a higher dividend yield, are also popular with dividend investors. One REIT that I admittedly did not know was a REIT until recently, was Iron Mountain (IRM). This stock came across my radar when I started to see more trending articles on the stock due to its high dividend yield of 8%.
A Brief Overview
If you’ve worked in corporate America at anytime over the past 40 years you have likely seen their boxes around the office.
Iron Mountain is primarily a secure document storage company that specializes in stowing away those important paper documents which were usually large in number and essential for many companies to run.
Source: IRM Presentation
The company also offers shredding and disposal services for whatever your company may have in storage and they serve 95% of the Fortune 1000 companies.
Iron Mountain is not just located in the US, they have expanded internationally and derive 19.4% of their 2018 revenue from operations overseas. As you can see below however, they still generate the majority of their revenue through plain old storage and services domestically in the US.
Source: IRM Presentation
You would think that the paper storage business is a dying one due to many documents being able to be secured as soft copies. Much like traditional retail versus Amazon, the best days of the physical paper storage industry may be behind them. However, there may be a case for IRM as they are the only real big player in this niche field and an argument can be made that the legal system has not fully switched over to soft documents from hard copies yet. Things like incorporation documents and originally signed important documents of a company will still need to be stored somewhere secured.
Although this remains a lucrative core business, management is on the hunt for growth and they think they have found it in emerging markets and by managing data centers. Emerging markets have been an obvious choice for growth for a while now and the company’s reputation has helped establish them in 50 countries.
The other growth area management sees are data centers. Warehouses that can hold the mainframes needed to power company’s IT operations as we as cloud computing are growing in demand and Iron Mountain is using their experience in real estate and their existing footprint to meet these growing needs.
Source: IRM Presentation
The base of the growth pyramid above is to make the core business more profitable by expanding the EBITDA margins. Management has been pretty successful in doing this so I have to give credit where it is due. If you take a look at their latest 10k they provide a breakdown of how they have managed to grow the adjusted EBITDA which adds back a number of non cash items.
Source: IRM 10k
It’s also worth noting that IRM is relatively new to the REIT business. They only converted to a REIT from a corporation in 2014 so we only have about 5 years of comparable history to go off of in terms of their behavior as a REIT.
What About That Dividend?
Ok so it’s not the most exciting industry in the world but that dividend though! At the current price of $31.68 a share, it is yielding about 8% based on its 2019 dividends of $0.61 per share. This puts it as one of the highest yielding non-mortgage REITs in its class.
Source: iREIT
As I mentioned before though, people often get caught in the trap of safe guaranteed income. If you had stayed away from dividend traps in the REIT sector, you could have crushed the return of some of the high dividend yielders in their field.
Source: iREIT
When I started to investigate the stock I became a bit alarmed at a dividend of $2.44 for 2019 when their earnings last year were $1.21 per share. Basically they were paying all their investors a cash payment which was double what they made in profit. The dividend had to be coming from somewhere other than just earnings.
That somewhere was borrowing, IRM ramped up its debt load and despite the talk of growth and investment, their dividend policy says different. IRM is currently devoting scant resources to growth and focusing more on paying out a stable dividend. They have managed to bring the leverage ratio down in line with their peers though as recently as the first quarter.
Source: IRM Presentation
Rather than look at earnings, my investigation pushed me towards adjusted funds from operations, or AFFO. This is the real figure you should be looking at according to the industry body NAREIT and IRM themselves.
In fact, IRM even went to the trouble of creating a normalized AFFO table of earnings, taking out things like one time gains or expenses to give investors a better sense of what their ongoing cash flow looks like.
Source: IRM 10k
So now that we have an idea of what their AFFO looks like, I added the cash dividend payments to the the normalized AFFO below to compare.
Source: IRM 10k and author’s calculations
There seems to be a pretty consistent deficit there although not particularly alarming, this means the funds have to be coming from somewhere and it’s likely coming from the increased debt. Management keeps touting that they have a responsible plan to grow and that they will maintain that dividend.
Source: IRM Presentation
just to be sure, I took a look at it a different angle as well. I took the adjusted EBITDA figure the company provided and subtracted 3 key deductions: cash interest expense, cash capital expenditures and cash dividends paid. These were my results:
Source: IRM 10k and author’s calculations
It’s starting to look like no matter how you cut it, this dividend is not going to be sustainable in the long term.
What is a bit worrying though, is that in a few articles I have read on IRM, I kept seeing this chart from the company presentation.
Source: IRM Presentation
It took me a while to wrap my head around it but to me, it still doesn’t make sense. Capex is very small on the left, expected to be $155 million for 2019 but then on the right they are saying they they will spend about $575 million on capital needs and investments. To me, the story of the AFFO and adjusted EBITDA is more accurate: decent for a dividend play but don’t expect much growth and potentially a dividend cut, management is literally putting it right out there in their own presentation.
Conclusion
I wouldn’t expect that dividend to hold up for long, although there is a pretty decent dividend that can still be made post any possible cut, don’t expect that 8% yield to be going even higher in the near future. In the bull’s favor though, there is a technical argument to be made for this stock as it currently is bouncing around its recent lows as can be seen below.
Source: Seeking Alpha
So this could potentially end up being a value play as well as high dividend play. IRM may be worth it for a little extra change in the short term, but if growth is your goal, look elsewhere than IRM.
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