Digital Realty(NYSE: DLR) stock has dropped about 30% from the all-time high that it hit in late December. My own investment in it has been off about 18% since I bought it, but I have no plans to sell. Certainly not now.
My reasons are threefold. First, this is global data center operator is a great company in a great business, and its stock is likely to recover along with the general economy whenever that time comes. Second, its recent woes are shared by the sectors it serves, and not tied specifically to anything at Digital Realty itself. And third, this real estate investment trust (REIT) has a long record of dividend growth and has the financial wherewithal to keep it up.
A critical supplier in a critical business
Data centers are critical to the massive buildout of digital networks needed to serve cloud computing, the Internet of Things, and large-scale artificial intelligence applications. What's more, these centers feed the growing appetite for data storage and movement capabilities that many companies now require.
Digital Realty itself already has a network of more than 290 data centers on six continents and will play a significant role in the rapid, global expansion of "hyperscale" centers, particularly large facilities that power the world's biggest companies, over the next several years.
Digital Realty stock has been weighed down recently in large part because of the general tech stock selloff. But the REIT has also been hit with concerns about big customers, including the likes of Microsoft, Amazon, Oracle, and Alphabet's Google becoming big competitors. Indeed, so far this year, Digital Realty stock is down even more than the tech-heavy Nasdaq, as the chart above shows.
But that hasn't stopped Digital Realty from logging record bookings for its services in the first quarter. The company is also pursuing aggressive expansion plans, including recent land purchases to use to develop new centers in Switzerland, France, India, Ireland, Spain, and Germany. That follows Digital Realty's purchase in January of a majority stake in an operation with seven data centers in South Africa.
And speaking of Oracle, that cloud services giant just announced a partnership with Digital Realty to use the latter's Interxion Paris Digital Park as host for Oracle's second "cloud region" in the French capital. Digital Realty bought Interxion just a couple of years ago. The Paris center is the fourth-largest internet hub in the world, the companies said in their July 18 announcement.
A lot of customers and a lot of dividends
Digital Realty currently has about 4,300 customers, which adds diversity to its income flow. Plus, an average weighted lease life of five years should allow for fairly consistent rent increases. In sum, there appears to be ample runway here for continued growth from an infrastructure REIT that went public at $12 a share in 2004 and now trades at about $123, good for a yield of about 4% after 17 straight years of dividend increases.
Further, funds from operations (FFO) have produced a compound annual growth rate (CAGR) of 10% since 2005. Yet, with the recent downturn in price, the price/FFO ratio is only about 11.8, indicating a good time to not only hold, but maybe buy more.
A pure-play data center survivor that doubles as an income stock
As one of only two surviving pure-play data center REITs after a spate of acquisitions, you never know -- Digital Realty might be a takeover target itself someday, when it would likely sell at an attractive premium.
Meanwhile, Digital Realty stock is still considered a "moderate buy" by a consensus of 12 analysts, who also give it a target price of about $165. That would be a 33% gain, perhaps not back to that all-time high of earlier this year, but still a nice gain if you buy at current levels.
I own Digital Realty as a buy-and-hold. In that regard, it has not failed to deliver: The stock boasts 19 straight years of dividend increases and a current yield of about 4%. With its own impressive gains in such a growth-oriented industry, I won't be selling now or likely anytime soon. In fact, I may be buying.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Marc Rapport has positions in Amazon and Digital Realty Trust. The Motley Fool has positions in and recommends Amazon, Digital Realty Trust, and Microsoft. The Motley Fool has a disclosure policy.