Company Description: Digital Realty Trust, Inc., a real estate investment trust (REIT), that owns, acquires, repositions and manages technology-related real estate.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
DLR is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 74.3% premium to its calculated fair value of $77.31. DLR did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
DLR earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. DLR earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 2005 and has increased its dividend payments for 17 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA (20-year Treasury bond). Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $566 is below the $1,800 target I look for in a stock that has increased dividends as long as DLR has. The stock's current yield of 3.33% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company's peer group includes: Brandywine Realty Trust (BDN) with a 5.9% yield and CoreSite Realty Corporation (COR) with a 4.5% yield.
Conclusion: DLR did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks DLR as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $84.45 before DLR's NPV MMA Differential increased to the $500 minimum that I look for in a stock with 17 years of consecutive dividend increases. At that price the stock would yield 5.3%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $500 NPV MMA Differential, the calculated rate is 8.3%. This dividend growth rate is higher than the 3.7% used in this analysis, thus providing no margin of safety. DLR has a risk rating of 2.0 which classifies it as a Medium risk stock.
DLR has found its niche by focusing on the technology side of the real estate market. A portfolio of highly coveted properties and high switching costs will keep DLR generating steady profits over the long haul. In addition, its relatively low free cash payout and debt to total capital leave room for future dividend increases. DLR is trading well-above its calculated fair value price of $77.31, so for now I will wait for a more opportune time to add to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in DLR (0.3% of my Dividend Growth Portfolio).
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