Like building a house, constructing a dividend stock portfolio takes time and careful consideration. Each stock added to your portfolio either strengthens or weakens its foundation.
Iron Mountain Incorporated (NYSE:IRM) is a stock that has fortified my portfolio and has the potential to do the same for fellow dividend investors. Let’s take a deep dive into this real estate investment trust’s fundamentals and valuation assumptions to estimate the fair value of its shares.
Resumed Dividend Growth
Iron Mountain has taken steps to become a more competitive player in data centers by lowering its debt and dividend payout ratio over the past four years. The company’s leverage ratio has gone down from 5.7 to 5.1 as of June 30.
After freezing its quarterly dividend per share for four years, Iron Mountain recently announced a 5.1% dividend hike to $0.65. The company’s adjusted funds from operations (AFFO) per share payout ratio has improved from 81% in 2019 to 65.1% in 2022. For 2023, Iron Mountain expects a 63.4% AFFO per share payout ratio, well within its target range.
In the second quarter of 2023, Iron Mountain maintained its operating momentum. Total revenue increased by 5.3% year-over-year to $1.4 billion. Storage rental revenue grew at a double-digit rate, offsetting a slight decrease in service revenue. The company’s AFFO per share increased by 1.1% compared to the previous year.
Risks to Consider
Although Iron Mountain has proven itself as a fundamentally sound business, certain risks remain. Economic downturns could impact rent collection, and oversupply in the data center industry could affect growth prospects.
The Recent Rally
Iron Mountain’s shares have experienced a significant rally in 2023, increasing by 28% so far. However, based on valuation models such as discounted cash flows and dividend discount models, the shares appear to be overvalued, suggesting a potential retreat from the current share price.
Summary: Consider Iron Mountain for Your Watchlist
Iron Mountain offers investors a 4.1% dividend yield with a sustainable payout ratio, making it an attractive option for income and growth. However, given the current pricing, it may be prudent to wait for the stock to dip below $60 before making a move.