Freedom Buy

Purchases for my FI Portfolio have been few and far between the last few years.  That's not for lack of opportunities or desire rather it had to do with our lives being on a roller coaster.  However, there's a light at the end of the tunnel as our main goal for this year is to get rid of all non-mortgage debt and then refocus our energy towards building up the portfolio.  

We aren't contributing fresh capital to our investments just yet as we're focused on getting rid of our non-mortgage debt.  *Should be gone before the end of the year!*  However, that doesn't mean that we're not able to make new purchases thanks to the dividends that keep rolling in from our other positions.

Well, purchases had been a bit slow but as things have improved with our cash flow I've felt more comfortable deploying some of the dividends that have built up in the account.  Earlier this month I picked up a few shares in Digital Realty Trust (DLR) and last week I initiated 2 more positions as well.  I'll cover the first one today and the next one later this week.

On October 3rd I initiated a new position in Iron Mountain Inc. (IRM).  I purchased 28 shares at $33.65 per share.  The total cost basis, including commissions, came to $947.15 or $33.83 per share.

Iron Mountain is a Dividend Challenger with 8 consecutive years of dividend increases.  The most recent quarterly payout from Iron Mountain was $0.5875 per share.  That puts the YOC for my position at a hefty 6.95% and I can expect to receive $65.80 in dividends over the next year.

Due to this purchase my FI Portfolio's forward 12-month dividends are $6,748.26.

Business Overview

From Iron Mountain's investor relations website:

Iron Mountain Incorporated is the global leader for storage and information management solutions.  Through our network of more than 65 million square feet of space in 1,000 facilities across 36 countries, we help our diversified customer base reduce costs and mitigate risks associated with protection and storage of their information assets.  Our financial model is based on the recurring nature of our revenues.  The predictability of this non-cyclical revenue stream and the resulting strong free cash flow allow us to support high-return investments and attractive stockholder returns.

Management's goal is to change the business mix slightly by advancing their data center presence as well as increasing exposure to faster growing economies, namely emerging markets.  As of 2Q 2018 the mix sits at 82% developed portfolio and 18% growth portfolio with a target of 70%/30% by 2020.  

By focusing on higher growth opportunities management's hope is to move to a ~5% internal revenue growth rate and with margin expansion get to 5%+ adjusted EBITDA growth.  

Dividends

As a dividend growth investor any potential investment must Jerry Maguire me, i.e. "SHOW ME THE MONEEEEEEYYYY!!!!".  I judge that based on a company's history of both paying and growing dividends to shareholders.  As I mentioned earlier, Iron Mountain has increased dividend payments for 8 consecutive years.
 

*A full screen version can be found here.

I like to examine the dividend growth rates over varying time periods.  Since many businesses see their operations ebb and flow this smooths out the dividend growth and can give an idea of how things could look in the future across the entirety of a business cycle.

The 1-, 3- and 5-year rolling dividend growth rates can be found in the chart below.  

*A full screen version can be found here.

Since Iron Mountain reclassified it's business as a real estate investment trust, "REIT", the payout ratio is higher than a regular corporation.  However, compared to most REITs the payout ratio is right in line with the norm for the industry.  

Management's target is for a payout ratio between 70-75% by 2020.  So dividend growth is likely to lag behind growth in AFFO and then begin to track it moving forward.

Management is also very open about their guidance for dividends too.  During the Q2 conference call management reiterated their guidance of $2.54 in minimum dividends per share by 2020.  That would be right around a 4% annualized growth rate over the next 2 years which looks good considering the starting yield is nearly 7%.

Valuation

Shares of Iron Mountain look pretty cheap.  Using management's guidance the estimate for 2018 AFFO per share is $2.95, 2019 is $3.07 and 2020 is $3.56.  My purchase price values shares at 11.5x, 11.0x and 9.5x the AFFO estimates which looks attractive.

Another rough valuation technique is to use the Dividend Discount Model.  Instead of solving for the price with an assumed growth rate, for a quick and dirty valuation I like to solve it backwards by figuring out what kind of growth rate is required to justify my cost basis at the time of purchase.

Using $2.35 as the starting dividend, my cost basis of $33.83 and a 10% required annual return, Iron Mountain needs to average just 2.9% annual growth in their dividend to support my purchase price.  Considering that management is looking for 4% growth over the next 2 years and then mid-single digit growth each year after 2020 there's a pretty good margin of safety.

Conclusion

Obviously I'd have preferred to purchase shares even lower; however, I'm fairly confident that I'll be a very happy investor over the next 5-10 years by purchasing IRM at this level.  I feel that Mr. Market is pricing shares of IRM essentially at a point where no growth is baked into the price.  However that just isn't the case if management is to be trusted which I feel they are.  Mid single digit growth should be achievable with the potential for even more over time.  That coupled with the fact that valuation expansion should boost returns over the longer term as well I think that shares are attractively valued.

I'm not alone in my feeling that Iron Mountain shares are undervalued currently.  Brad Thomas on Seeking Alpha had an excellent write up about IRM and considers them a strong buy at the current level.


What do you think of my purchase of Iron Mountain?  Interested in adding it to your own portfolio?  Why or why not?