Iron Mountain's High Dividend Yield Comes With Risks

Eric Compton: Iron Mountain is a REIT, or real estate investment trust, and pays one of the better dividend yields compared to peers. As of October 2017, the FTSE Nareit All Equity REITS index had a dividend yield of 3.85%. Compare this to the current yield of nearly 5.8% for Iron Mountain. REITs often make sense for investors in search of steady yield-generating stocks, however, Iron Mountain is not your typical REIT, and there are legitimate risks which factor into the higher yield which investors should be aware of.

While we assign the firm a narrow moat rating, as it is the largest global enterprise storage company, we also assign the stock a negative trend. This is reflective of the ongoing pressures within the enterprise storage sector. While regulations will undoubtedly force certain firms to store hard copies of certain documents for some time to come, corporations have gradually shifted more and more of their information storage to electronic mediums. In mature markets, storage volume is often flat or even down in certain periods for Iron Mountain because of this trend away from hard storage. To make up for this, Iron Mountain relies on acquisitions in less developed markets for roughly 40% of its total growth. Combine the heavy amount of cash needed to fund these acquisitions with existing capital expenditures, and the firm eats up most of its cash flows before even paying out its dividends.

In fact, this past year, Iron Mountain had to take on additional debt in order to fund its dividend. While the firm still has room to take on additional debt before tripping any debt covenants, we recognize that cash does get pretty tight, and funding a dividend with debt indefinitely is not sustainable. As a result management will need to execute on its acquisition ambitions, acquiring more operating earnings at cheap enough prices, in order to keep their debt ratios reasonable. This is certainly doable, but will require excellent execution and therefore entails some risk of failure.

A further sign of the times is that Iron Mountain is the firm is rated within junk bond territory by multiple rating agencies. For investors OK with taking on higher risk for higher yield, and who are confident in management's ability to execute on more acquisitions to help drive these future dividends, Iron Mountain may make sense. Otherwise, with the stock trading just above our fair value estimate, we may recommend waiting, or looking somewhere else.