Stocks in the clouds
You’ve probably already noticed that issues triggered by the pandemic have pushed many of us into working, playing, shopping, socializing and even accessing medical care online much more than before.
Facilitating this online activity surge translates to a similar increase in the amount of processing, data storage and networking equipment necessary to make those activities happen. While companies could maintain and operate such equipment on their own, many find it advantageous to house their data in “cloud” data centers owned and operated by independent third parties.
The good news is that many cloud data centers are owned and operated by Real Estate Investment Trusts, commonly known as “REITs.”
REITs are corporations that invest mainly in real estate and don’t pay federal income taxes as long as they pay out at least 90% of their income to shareholders. Consequently, REITs pay relatively high dividends compared to most stocks.
There are six data center REITs: CoreSite Realty (ticker symbol COR), CyrusOne (CONE), Digital Realty Trust (DLR), Equinix (EQIX), QTS Realty Trust (QTS), and Switch (SWCH).
In my experience, share prices generally track per-share earnings (EPS) closer than any other factor. With that in mind, here are the two with the strongest expected earnings growth numbers.
Equinix (ticker symbol EQIX): The largest in terms of revenues, Equinix operates more than 100 data centers in North and South America, Europe and Asia. Analysts expect Equinix to pull in around $6.0 billion in revenues this year and grow that number by another 9% or 10% in 2021. They’re looking for Equinix to report around $24 per share of earnings this year, 6.5% above year-ago, and grow that number by another 8.5% next year. Equinix is paying quarterly dividends equating to a 1.5% dividend yield (annual dividends percent of current share price).
CyrusOne (CONE): Owns and operates more than 40 data centers in the U.S., Europe, and Asia. Analysts expect revenues to grow 5% this year to $520 million, and then another 11% next year. In terms of earnings, they’re looking for 6% EPS growth to $3.84 per share this year and 7% EPS growth next year. CyrusOne is paying a 2.6% dividend yield.
Given all of the unknowns regarding the COVID virus, it’s hard to find stocks likely to do well no matter what. But I think both of these data center REITs qualify. Based on their recent trading prices and this year’s expected earnings, Equinix’s price/earnings ratio is 30 compared to 20 for CyrusOne. Thus, if you’d had to pick one, I’d choose CyrusOne.
As always, consider these REITs to be research candidates, not a buy list. Do your own due diligence. The more you know about your stocks, the better your results.
Harry Domash of Aptos publishes the Winning Investing and the Dividend Detective websites. Contact him at www.winninginvesting.com or Santa Cruz Sentinel, 324 Encinal St., Santa Cruz, CA 95060. To see previous Domash columns, visit santacruzsentinel.com/ topic/Harry_Domash.