DLR: Will This Previously “A” Rated Stock Be Forgiven?

When analyzing the dividend safety data of Digital Realty Trust (NYSE: DLR), I was reminded of The Who’s song “A Quick One, While He’s Away.”

It tells the tale of a woman whose “man’s been gone, for nigh on a year”. The woman has a couple of indiscretions during that period, and when her partner returns, she confesses everything.

While we never learn if they live happily ever after, the man does say repeatedly, “You are forgiven”.

Digital Realty investors, who have been used to nothing but a stellar performance by the data warehouse real estate investment trust (REIT), got a bit of a shock last year.

Funds from operations (FFO), the measure of cash flow used by REITs, fell for the first time in years.

That is a sin that SafetyNet Pro has a tough time forgiving.

Digital Realty has 280 data centers in more than 20 countries on every continent except for Antarctica. Its data warehouses host servers from many of the largest companies in the world, including AT&T (NYSE: T), IBM (NYSE: IBM), and Clear Channel.

After several years of annual increases in FFO, Digital Realty saw a slight decline in 2020.

Digital Realty's FFO

We never want to see cash flow declining. It makes SafetyNet Pro nervous that the company may not be able to afford its dividend if that decrease continues.

The fact that FFO is expected to increase significantly this year takes some of the pressure off.

So does the fact that even in 2020, Digital Realty’s payout ratio was below 100%, which means it created more FFO than it paid in dividends.

Last year, Digital Realty paid 91% of its FFO in dividends. For REITs, as long as the payout ratio is below 100%, we’re fine with it. And the fact that this year is expected to see a big increase in FFO makes us feel even better.

Finally, the company has a stellar track record when it comes to its dividend. It has not only continued to pay the dividend without a cut but also raised the payout per share every year for 15 years. Digital Realty currently pays $1.12 per share quarterly for a 3.2% annual yield.

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