Digital Realty Trust (DLR), one of the largest computer services facility companies, is a buy for the total return and income investor. The management of DLR is good and has continued to grow the company by buying bolt-on companies, and using its cash to expand existing properties and develop new ones. The stock comprises 5.7% of The Good Business Portfolio, my IRA portfolio of good business companies that are balanced among all styles of investing.
Source: 3rd Qtr. Earnings call slides
As I have said before in previous articles:
I use a set of guidelines that I codified over the last few years to review the companies in The Good Business Portfolio (my portfolio) and other companies that I am reviewing. For a complete set of guidelines, please see my article “The Good Business Portfolio: Update to Guidelines, March 2020”. These guidelines provide me with a balanced portfolio of income, defensive, total return, and growing companies that hopefully keeps me ahead of the Dow average.
Digital Realty Trust has an interesting five-year chart going up and to the right for 2016-2017, then it hit the flat year 2018 before going up again in 2019 and is showing strength in this virus situation of 2020. As new bolt-on companies are added, it takes at least a year before the new properties are fully integrated and start making profits, and this is how DLR grows.
Fundamentals and company business review
The method I use to compare companies is to look at the total return, as shown from my previous articles in the section below.
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the Good Business Portfolio’s objective. My total return guideline is that total return must be greater than the Dow’s total return over my test period. I chose the 59-month test period (starting January 1, 2016, and ending to date) because it includes the great year of 2017 and 2019 and other years with fair and bad performance.
The great DLR total return of 116.32% compared to the Dow base of 57.70% makes Digital Realty Trust a great investment for the total return investor who also wants a steadily increasing income. Looking back five years, $10,000 invested would be worth over $23,400 today. This gain makes Digital Realty Trust a great investment for the total return investor looking back, and has future growth as the worldwide need for more computer facilities continues to grow.
Dow’s 59-month total return baseline is 57.70%
Digital Realty Trust does meet my dividend guideline of having dividends increase for 8 of the last ten years and having a minimum of 1% yield. DLR has an above-average dividend yield of 3.05% and has had increases for fifteen years, making it a good choice for the dividend growth investor. The dividend was last increased in February 2020 to $1.12/Qtr., up from $1.08/Qtr., or a 3.7% increase, with increases expected to continue for many years. The five-year average payout ratio of FFO is moderate, at 73% for a REIT. After paying the dividend, this leaves cash remaining for increasing the business of the company by buying bolt-on companies.
I also require the CAGR going forward to be able to cover my yearly expenses and my RMD, which is zero in 2020, with a CAGR of 5.2%. My dividends provide 3.3% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.2%. The three-year forward S&P CFRA CAGR of 3% is poor, missing my guideline requirement. The good future growth for Digital Realty Trust can continue its uptrend, benefiting from the continued strong growth of computer online sales and streaming content like Netflix worldwide and in the United States. I feel this will greatly add to the FFO of Digital Realty and bring the CAGR up to my present 6% goal.
I have a capitalization guideline where the capitalization must be greater than $10 billion. DLR easily passes this guideline. DLR is a large-cap company with a capitalization of $40.4 billion, well over the guideline target. Digital Realty Trust 2020 projected FFO cash flow at $1.5 billion is good, allowing the company to have the means for growth and increased dividends each year.
One of my guidelines is that the S&P rating must be three stars or better. DLR’s S&P CFRA rating is three stars or hold with a target price of $170, passing the guideline. DLR’s price is presently 16% below the target. DLR is under the target price at present and has an above-average forward price to FFO ratio of 23, making DLR a buy at this entry point. If you are a long-term investor that wants a good steady increasing dividend income and total return growth, you may want to look at this company.
One of my guidelines is would I buy the whole company if I could. The answer is yes. The total return is strong, and the above-average growing dividend makes DLR a good business to own for income and growth. The Good Business Portfolio likes to embrace all kinds of investment styles but concentrates on buying businesses that can be understood, make a fair profit, invest profits back into the business, and also generate a good income stream. Most of all, what makes DLR interesting is the potential long-term growth of their business as the worldwide need for computer facilities increases. DLR gives you an increasing dividend for the dividend investor and a great total return.
I look for the earnings of my positions to consistently beat their quarterly estimates. For the last quarter on October 29, 2020, Digital Realty Trust reported FFO earnings that beat expected by $0.05 at $1.54, compared to last year at $0.24. Total revenue was higher at $1,020 million, beating by 26.5% year over year and beating by $26.68 million with the expected total. This was a good report with bottom-line beating expected and the top line increasing compared to last year. The next FFO earnings report will be out January 2021 and is expected to be $1.54 compared to last year at $1.68, a small decrease.
As per data from Reuters:
Digital Realty Trust is a real estate investment trust (REIT) engaged in the business of owning, acquiring, developing, and operating data centers. The Company is focused on providing data center and collocation solutions for domestic and international tenants across a range of industry verticals ranging from financial services, cloud, and information technology services to manufacturing, energy, healthcare, and consumer products.
On November 3, 2020, Digital Reality Trust announced the acquisition of Lamda Helix, a Greek company, expanding the company’s presence in Europe. The quote below is from the press release.
Lamda Hellix is the largest carrier-neutral colocation and interconnection provider in Greece, offering best-in-class cloud, colocation, and connectivity solutions. Its state-of-the-art data center campus in Athens is the largest in Southeastern Europe and the most interconnected in Greece. It currently houses two data centers hosting approximately two-thirds of Greek data center communities. The facilities are serviced by all fiber and connectivity providers operating in the country and serve a wide variety of blue-chip customers, including telecom providers, government agencies, financial services institutions, cloud service providers, and two leading internet exchanges.
Overall, Digital Realty Trust is a good business with my estimated 7% CAGR growth next year as the United States and foreign economies grow going forward, with increasing demand for DLR’s facilities. The good dividend income brings you cash as I continue to see further growth as the world economy grows after the virus pandemic is controlled in a few months.
From the 3rd quarter earnings call, DLR’s balance between income and growth provides both values for the shareholder and value through increasing dividends for the income investor. The method for long-term value creation is a global, connected, sustainable framework. Despite the pandemic, the third-quarter results demonstrated the strength of this framework. DLR’s business is increasingly global, with nearly 60% of third-quarter bookings outside North America. This robust and diverse business mix demonstrates the power of a global platform and further validates the only global provider dedicated to the full customer spectrum.
The graphic below shows the expansion into Europe by buying bolt-on companies.
Source: 3rd Qtr. Earnings call slides
This shows the feelings of top management for the continued strong development of the changes necessary for the continued growth of the Digital Realty Trust business and shareholder return. DLR has good constant growth and will continue as the world economy and population grows. The growth is being driven by buying bolt-on companies and an expansion of existing properties. The graphic below shows the worldwide scope of the company’s reach. This includes 700+ connectivity providers in 280+ data centers across 24 countries.
Source: 3rd Qtr. Earnings call slides
Digital Realty Trust is a great investment choice for the income investor with its above-average yield and a strong choice for the total return investor looking back. Digital Realty Trust is 5.7% of The Good Business Portfolio and will be held as a full position. I buy what I consider great businesses that are fairly priced, and the present DLR entry point looks good, giving you a 16% gain to the target price. Good growing businesses do not come cheap, but over time, they grow and grow. If you want a solid growing dividend income and good total return in the computer support business, DLR may be the right investment for you.
The total return for the Good Business Portfolio is ahead of the Dow average from 1/1/2020 to November 6 by 1.91%, which is a gain above the market loss of 0.71% for the portfolio with Boeing (BA) a strong drag and 737 Max expected to fly this year. Each quarter after the earnings season is over, I write an article giving a complete portfolio list and performance. The latest article is titled “The Good Business Portfolio: 2020 2nd Quarter Earnings and Performance Review”. Become a real-time follower, and you will get each quarter’s performance and portfolio companies after this earnings season is over.
Disclosure: I am/we are long BA, JNJ, HD, DHR, MO, PM, MCD, PEP, DLR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Of course, this is not a recommendation to buy or sell, and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account, and the opinions of the companies are my own.