Digital Realty (DLR) Hikes Dividend By 8.6%: Time To Hold?

Ushering in good news for its shareholders, recently Digital Realty (NYSE:DLR) announced that its board has approved an 8.6% hike in quarterly common stock cash dividend rate to $1.01 from the 93 cents paid earlier.

The new dividend for the first quarter of 2018 will be paid on Mar 30 to shareholders of record on Mar 15, 2018. Based on this hiked value, annualized yield comes in at about 4.1%, considering Digital Realty' closing price of $98.20 on Mar 2.

Notably, Digital Realty has a solid track record of enhancing shareholders’ wealth. The company has raised dividend every year since its initial public offering and the March 2018 hike marks the 13th consecutive year of increase.

We believe Digital Realty has solid scope of generating steady growth in cash flow to support its dividend policy. Last month, the company reported fourth-quarter 2017 core funds from operations (FFO) per share of $1.55 which exceeded the Zacks Consensus Estimate of $1.52. The core FFO per share also came in higher than the year-ago quarter’s tally of $1.43. Results were supported by growth in revenues.

With growth in cloud computing, Internet of Things and big data, and an increasing number of companies opting for third-party IT infrastructure, data-center REITs are experiencing a boom market. In fact, demand is outpacing supply in top-tier data center markets and despite enjoying high occupancy, the top tier markets are absorbing new construction at a faster pace. This, along with an improved outlook for economic growth, is anticipated to drive demand for data centers. Amid these, accretive acquisitions and development efforts are expected to drive top-line growth.

In September 2017, Digital Realty announced the completion of a merger with DuPont (NYSE:DWDP) Fabros in an all-stock deal, for an enterprise value of about $7.8 billion. This move enhanced Digital Realty’s portfolio in the top U.S. data center metro areas across Northern Virginia, Chicago and Silicon Valley. It helped Digital Realty enhance hyper-scale product offering and grow its blue-chip customer base.

Further, the company focuses on maintaining an investment grade balance sheet and is committed to a conservative capital structure. It enjoys ample and growing liquidity, with diversified sources of capital and has a well-laddered debt maturity schedule with no material maturities until 2020.

However, the company faces intense competition in the industry. Amid this, aggressive pricing pressure is likely to continue in the upcoming period. Moreover, Digital Realty’s earnings have a notable exposure to foreign currency translation. Also, the company has a substantial debt burden. Further, rate hike adds to its woes.

Digital Realty currently has a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The stock has depreciated 8.8% over the past year, outperforming the 9.3% loss incurred by the industry it belongs to.

Solid dividend payouts remain arguably the biggest enticement for REIT investors. Apart from Digital Realty, some other REITs which announced dividend hikes in recent months include Prologis Inc. (NYSE:PLD) , Simon Property Group, Inc. (NYSE:SPG) and AvalonBay Communities, Inc. (NYSE:AVB) .

Note: Funds from operations (“FFO”), a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.

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Simon Property Group, Inc. (SPG): Free Stock Analysis Report

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