Tyler Crowe, John Rosevear, and Brian Feroldi, The Motley Fool
Updated
The terms "growth" and "high-yield" rarely go together well when it comes to investments. Growth typically means that companies need to plow lots of money back into the business on a regular basis, and high-yield normally means a slow growth industry where the best allocation of capital is to return it to shareholders. Every once in a while, though, certain companies have just the right business where high yield and growth
Every once in a while, though, certain companies have just the right business where high yield and growth can coexist. Our investing contributors have highlighted three -- General Motors(NYSE: GM), Iron Mountain(NYSE: IRM), and STAG Industrial(NYSE: STAG). Here's why these stocks fit this unique mold.
Stack of progressively larger coins on a desk while a business person points in the direction of the coin stacks.
This century-old automaker is a surprise earnings-growth story
John Rosevear (General Motors): Here's a contrarian investment idea: General Motors as a growth stock.
Bonkers? Consider that GM CEO Mary Barra herself has been making that case -- and she's far from bonkers, I promise. Barra, who has quietly argued for a while that GM's stock is undervalued, was asked last year whether she thought investors should think of GM as a dividend stock or as a potential earnings growth story.
But as she also pointed out, GM has also positioned itself to be a major player in the emerging technologies and business models that threaten to upend the traditional auto industry. After all, as she put it, GM has deep expertise in the complex art and science of integrating technology into vehicles and mass-producing them.
That's not just talk. The reality is that GM is close to mass-producing self-driving cars for ride-hailing use -- almost certainly closer than any other company, including those investor darlings in Silicon Valley. It's also already a player in "mobility services", with a big stake in Lyft and a car-sharing subsidiary, Maven, that may be on course to get into the ride-hailing business on its own.
Barra thinks that expertise -- and the technological edge that GM has established by moving early and aggressively into electric vehicles and self-driving -- has the potential to, in her words, "dramatically change the current business from an earnings perspective."
GM's shares have run up a bit recently, but it's still trading at around 7 times earnings -- a value by historical standards. You may have to wait a while before the bottom-line growth materializes, but if you buy now and reinvest that dividend, you may be very happy indeed when it happens.
A monster yield with a growth kicker
Brian Feroldi (Iron Mountain): It's not often you can find a stock that offers both growth and yield, which is why Iron Mountain is such an outlier. The records storage company is structured as a REIT, so it's required to pay out the majority of its net income as a dividend. With its 5.6% dividend yield, there's no doubt that Iron Moutain offers investors an income stream that is far above average. More importantly, management believes it can produce 9% growth in adjusted funds from operations -- which is a REIT proxy for earnings -- over the next few years. That makes this company a growth stock in my book.
So how is the company going to produce that kind of growth? First, the company's core business -- records and information management, data management, and shredding -- services more than 230,000 customers worldwide, including 95% of the Fortune 1000. Since there's always demand for secure record keeping and Iron Mountain boasts a very low turnover rate, investors can count on its core business to crank out modest growth over time.
With a stable cash flow machine in place, Iron Mountain can turn its attention and resources to buying out competitors and entering new businesses. Recent examples include the acquisition of a data-center business in the Midwest and the buyout of a key international rival called Recall Holdings last year. After the acquisitions are made, Iron Mountain applies its know-how to improve margins. When combined with the increased revenue, profits can growth at an above-average pace.
Add it all up, and I think that Iron Mountain has a decent shot at delivering on its promises. If so, then shareholders who buy today stand a good chance of earning double-digit total returns.
Tapping into an under-served market
Tyler Crowe (STAG Industrial): Like Iron Mountain, STAG Industrial is a REIT. It sports a dividend yield of 5% and taps into a market that most other real estate investment trusts avoid: industrial properties, such as distribution warehouses.
Typically, trust shun this kind of property because it's typically single occupant and the risk of no tenants is much higher. STAG mitigates that risk by investing in a large portfolio of these facilities, reducing the risk of vacancy at any single property at a given time.
With little competition in this industry, STAG is able to get favorable rates on a sizable market. According to management, single-tenant industrial properties are a $500 billion market, and it's been able to acquire properties at a capitalization rate higher than 9% while asset sales have carried capitalization rates around 6%. (In real estate, you want to buy at high cap rates and sell at low ones.) This formula has worked incredibly well for the company, as it has grown revenue 55% over the past three years.
Dividend growth has been a little tepid lately as it puts more of that new revenue toward debt reduction, but with a much better-looking balance sheet and ample opportunities to grow the business, investors are likely to see this high-yield dividend grow even more in the future.
Brian Feroldi owns shares of Stag Industrial. John Rosevear owns shares of General Motors. Tyler Crowe has no position in any of the stocks mentioned. The Motley Fool recommends Stag Industrial. The Motley Fool has a disclosure policy.
