Goldilocks, Market Cap, and Aggregate Dividends

We're experimenting with using the relationship between a company's market capitalization and its aggregate dividends as a tool for assessing the Goldilocks quality of its stock price. By Goldilocks quality, we mean whether the value of a company's stock price is too low, too high, or just right, which would correspond to an investing decision to buy, sell or hold.

Stock Market Chaos!

Why use market cap and aggregate dividends for assessing the value of a stock? We've already established that there's a useful relationship between price per share and dividends per share when dealing with stock indices, but the increase of stock buybacks over time makes that direct approach a dicier method for evaluating individual stocks. Using market cap and aggregate dividends can eliminate the potential for a company's management to artificially dress up its "per share" financial metrics with buybacks, letting us use the next closest thing to share prices and dividends per share in determining whether it makes sense to buy, sell or hold its shares.

We've developed the basic method for evaluating an individual firm's stock valuation using General Electric (NYSE: GE) as our experimental guinea pig, but we have been seeking another publicly traded company to evaluate.

We've found a candidate: Iron Mountain (NYSE: IRM). IRM is a documents management company that is set up as a Real Estate Investment Trust (REIT), which is perhaps best known for archiving the paper records of hundreds of large corporations, but which has been expanding into digital records management.

That's a boring, but lucrative business, where the company is currently paying an annual dividend of $2.47 per share. With a closing share price of $26.33 on 29 October 2020, that's a dividend yield of nearly 9.4%.

By contrast, the dividend yield of the S&P 500 was 1.75% back on 30 September 2020.

That large difference makes IRM an interesting stock to consider. An relatively outsized dividend yield can be both an attractive stock for investors seeking dividend income and a potential harbinger of future dividend cuts, which is the kind of stock investors would generally seek to either sell or avoid.

Which is IRM? Here's a chart showing the relationship between IRM's market cap and aggregate dividends from 2010 up to 29 October 2020, where we've focused on the periods approximately coinciding with Iron Mountain's dividend declaration dates.

Iron Mountain (NYSE: IRM): Market Capitalization vs Forward Year Aggregate Dividends per Share at Dividend Declaration Dates, 2010-2020

Overall, we find there's a moderately strong relationship between IRM's market capitalization and its aggregate annual dividend payout, which currently sits at $0.71 billion with a market cap of roughly $7.59 billion.

In considering how investors have historical valued the stock at dividend declaration dates from 25 February 2010 through 5 August 2020, we find the current valuation is below the typical range we would expect given its history, which means one of two things: it's either a serious candidate for a dividend cut, or its shares are currently on sale for investors looking to pick up relatively easy money.

In August 2020, Action Biased made the case that the stock is due for a dividend cut, which our method suggests could be on the order of a 33% reduction from its current $2.74 annual dividend per share. The argument supporting a significant dividend cut recognizes the dividends the REIT paid in 2019 exceeded its Funds From Operations (FFO) by a significant margin, which is a consequence of the company having loaded up on debt to expand its digital records management operations. Cutting its dividend to cope with its debt could be advisable if it remains elevated.

Since then, presentations the company has made to investors have focused on the steps it has taken to restructure its debt at today's lower interest rates, which would make its current dividend level more sustainable. Analyst Mark Roussin picked up on that strategy in his argument that the company's stock is currently undervalued, which our analytical method suggests could provide up to a 20% gain given its current dividend payout and how investors have historically valued the firm.

So which is it? If you're looking for ideas of where to invest, you'll ultimately have to make that call for yourself, but you won't have long to wait to find out which potential view of the future will prevail. Iron Mountain will announce its 2020-Q3 financial results early on 5 November 2020 and will host a conference call for investors later that day.

According to analyst Rida Morwa, Iron Mountain may also announce a change in its dividend at that time. He's betting on it being a dividend increase, which for our method, would suggest the potential for a greater than 20% gain.

See? Interesting! Who knew a company in the record storage business could present so many possibilities for investors to weigh?