Freedom Buy - Doubling Down
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.
If you remember I initiated a position in Digital Realty Trust (DLR) in early September, if not go check out the post...I'll wait. *Insert elevator music*
Well, I closed out September by circling back to Digital Realty Trust and doubling down on my position. On September 27th I purchased 9 additional shares over the company at $111.50 per share. The total cost basis for this lot, including commissions, came to $1,008.45 or $112.05 per share.
Digital Realty is a Dividend Contender with 14 consecutive years of dividends increases. Digital Realty's most recent quarterly dividend payment was $1.01 per share. That puts the YOC for my position at 3.61% and I can expect to receive $36.36 in dividends over the next year.
Due to this purchase my FI Portfolio's forward 12-month dividends are $6,682.46.
I'll refer you back to the original post for the reasons why I think Digital Realty Trust looks attractive at these levels.
Non Business Reasons for the Purchase
If I liked it at $122.50 I should love it at $111.50...right? I made this purchase in large part due to the sell off that happened in the share price of Digital Realty Trust after my initial purchase. The share price had declined nearly 9% and I had enough cash lying around to make an additional purchase.
Admittedly this purchase was still not at a level that I'd have ideally purchase at; however, I'm not complaining one bit. Nearly a 10% discount from what I deemed was a good not great price was something I just couldn't pass up since I had cash available.
I was able to reduce my average cost basis from $123.05 down to $117.55 with this purchase. That's a solid 4.5% reduction and brings the YOC for the entire position up to 3.44%.
Reason for the Price Decline
The most likely reason for the decline was that management announced a 8.5 M share offering at $113. That's one of the things you have to live with when investing in REITs. Since they are required to pay out 90% of their net profits out to shareholders that leaves little growth from internally generated funds. Hence the need to access the capital markets via share offerings or additional debt.
At $113 per share I think the share offering was the better route to go. The "cost" of the shares comes to 3.57%, the dividend yield, which seems reasonable considering where interest rates are currently at.
While the share offering was a bit of a bummer to see, I trust management here to be doing the right thing for shareholders over the long run. Management is already making moves too by agreeing to purchase 424 acres of land in Virginia near their existing data centers there. They've also agreed to purchase Ascenty, a data center company in Brazil.
The valuation, using managements' FFO guidance, is decent but not exactly at a screaming buy level. Based on the forward guidance the P/FFO, the P/E equivalent for REITs, is sitting around 18.5x - 18.8x for FY 2018. Expectations are for FFO/share growth around 8% per year so there's room for my purchase to grow into its valuation.
Another very 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 $4.04 as the starting dividend, my cost basis of $112.05 and a 10% required annual return, Digital Realty needs to average at least 6.2% annual dividend growth in order to support my purchase. That looks achievable considering management is expecting 8% FFO/share growth per year.
It was nice to get a chance to double up my position in Digital Realty Trust especially at nearly a 10% discount from my original purchase price. I only have capital for 1 more purchase but wouldn't look to add more shares of DLR unless we see a stock price around $100-$105. I've got my eye on one other company that I'd like to initiate a position in if the price is right.
What do you think of my purchase of Digital Realty Trust? Do you typically try and average down your cost basis if the opportunity presents itself?