Shares of data center real estate investment trust (REIT) Equinix (NASDAQ: EQIX) rose 22.4% in 2020, according to data from S&P Global Market Intelligence. The move comes amid the market’s realization that data centers have been one of the beneficiaries of the COVID-19 pandemic.
Image source: Getty Images.
Simply put, stay-at-home and social distancing measures have boosted the use of video conferencing, digitalization (the Internet of Things), remote working, big data analytics, and so on. Throw in the advent of 5G networking, and it’s a recipe for strong growth in the future. In short, there’s increased demand for storing and distributing data, and that’s good news for data center REITS like Equinix and Digital Realty Trust.
The pandemic has accelerated many already strong trends. Not only will that improve growth prospects, but it will also de-risk the REIT’s existing investment plans. Indeed, the best way to think of Equinix is not so much as a low-growth, high-dividend yield REIT play, but as a REIT with many years of growth ahead of it.
This conclusion might be disconcerting REIT investors focused on dividends — Equinix’s dividend yield of 1.5% isn’t anything to write home about — , but the potential to increase the dividend is substantial. For example, management forecasts that adjusted diluted funds from operations (AFFO) per share will be $24.38-$24.61 in 2020, but the dividend payout is only $10.64 per share. In other words, the dividend is well covered.
A quick look at Equinix’s capital expenditures shows that that 92% of it went to non-recurring or expansionary items over the last year. Whichever way you look at it, Equinix is in growth mode.
Data source: Equinix presentations.
Looking ahead, Equinix investors will want to see continued revenue growth and also a demonstration of ongoing pricing power — the keys to growing AFFO and dividends in the future. Given the strong tailwinds behind it, investors in Equinix have every reason to feel positive about 2021.
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Lee Samaha has no position in any of the stocks mentioned. The Fintech Zoom owns shares of and recommends Equinix. The Fintech Zoom has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.