Volatility Is At Record Highs
The market sold off hard because of the coronavirus and rightly so. The virus is going to have a deep impact on the global economy, revenue and earnings for the S&P 500 are going to be bad, buybacks are getting canceled and dividends may be cut. Now that the market is down 30% from it’s high we should be able to find a bottom but there is one looming dark cloud we can’t seem to shake. Uncertainty.
While it is certain the virus will have an impact, and certain we will get through this crisis, it is incredibly uncertain how long it will take to contain the spread and how deep the economic impact will be. Until then, investors should focus on best-in-breed dividend-paying stocks whose services and income are virus-proof. Consumer staples are one sector whose businesses are immune to a recession but they aren't the only ones.
Communications Infrastructure, The New Age Of Real Assets
REITs are a great industry to invest in during uncertain times because of high yields and a perception guaranteed income. The trick is finding the right REITs and that has never been more true now. Not all are going to come through the virus threat unscathed. Mall operators and hospitality REITs are among the worst to own right now. We can expect widespread bankruptcies among retailers and hospitality companies and that’s not good for the REITs that rent them their properties.
Communications infrastructure is one industry with a virus-proof business model. These REITs own and operate real estate assets they rent to the communications industry. Properties include cell-tower locations, small cells, and miles upon miles of connective cables (think high-speed fiber optics) that are going to see increased demand during the viral crisis. Work-at-home solutions, home entertainment, interpersonal communication, and news all travel upon the networks.
I don't want to mislead anyone, we aren't going to see windfall profits in the sector, a suge of profits is not the point. The point is these REITs have steady, guaranteed revenue and safe dividends. If we can find some growth in there then all the better. As a reminder, EPS is not always a good measure of a REITs income. When I say earnings I am talking about FFO or funds from operations.
American Tower Corporation, An International Play
American Tower Corporation (AMT) is one of the largest owners of communications infrastructure worldwide. The company boasts more than 170,000 properties in its portfolio across all markets. This company is expecting to see high-single-digit revenue growth this year and next with similar EPS growth expanding to near 10% in 2021.
American Tower isn’t one of the higher-yielding REITs but you trade yield for safety. The 1.90% yield is lower than the broad market average but much safer. American Tower Corporation is paying only 53% of earnings with stable growth in the forecast. Many stocks in the S&P 500 will be cutting payouts if not suspending them.
Crown Castle, A Play On Domestic Telecom Infrastructure
Crown Castle International Corp (CCI) is a leading operator of telecom infrastructure in the U.S. The company owns more than 40,000 cell tower locations and 80,000 miles of fiber optic cables connecting every major market nationwide. The company is expecting to see revenue and EPS growth this year in the low-single-digits with both accelerating to high-single digits next. Growth will be driven in part by the 5G revolution and is expected to continue at a roughly 5% CAGR beyond 2024.
In terms of the dividend, Crown Castle International is one of the higher-yielding telecom REITs at 3.25% but there is a trade-off here as well. The payout ratio is running high which raises questions about the distribution heath but there are mitigating factors. First, most REITs tend to have high payout ratios because they are set-up to pay dividends, if they didn’t they’d lose their REIT status. Second, the forward payout ratio’s are much lower and suggest the company might continue its 5-year run of distribution increases.
QTS Realty Trust, Doubly Protected For Today’s Tough Times
QTS Realty Trust (QTS) is a data-center operator in the U.S. The company has a strong presence on the east coast and specifically around the greater Washington D.C. area. The company is well-positioned for accelerating growth in the cloud-computing/hyperscale industry and that is compounded by exposure to government.
QTS Realty Trust is a leader in government cloud-computing for one reason, security. QTS Realty Trust can’t guarantee cyber-security but it can, and does, operate the highest quality facilities enabling higher standards of security.
The growth outlook for QTS is good. The company is expecting double-digit revenue growth this year and a small acceleration next. EPS should grow about 4.5% this year and accelerate to over 10% in 2021. The yield is about 3.5% at today’s prices and relatively safe with a payout ratio near 69%.