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Lamar Advertising Bets on Billboards
02/01/2018 5:00 am EST
Carefully-selected REITs can provide income, dividend growth, and some capital appreciation; we believe that Lamar Advertising Co. (LAMR) represents a good opportunity for income and growth, notes Doug Gerlach, editor of Investor Advisory Service.
Lamar is one of the largest outdoor advertising companies in the U.S. It owns 149,000 billboards, including 2,700 digital billboards, the largest digital portfolio in the country. In addition, it owns 144,000 “logo displays” notifying motorists of restaurants and gas stations at upcoming freeway exits.
In late 2014, Lamar decided to convert from a corporate structure to REIT status. Although Lamar is required to pay out 95% of net income as dividends, it only pays out about 60% of cash flow. Capital spending makes up 20% of cash flow, leaving another 20% for acquisitions and dividend increases.
The year 2016 was aided by political campaigns, which were largely absent in 2017. While this may have only comprised 1%-2% of revenue growth, we believe it had a larger impact on cash flow. With good economic growth and an easier election-cycle comparison in 2018, we expect better growth going forward.
Near-term growth may also be aided by severe challenges facing iHeartMedia, the parent company of billboard rival Clear Channel. Clear Channel has been forced to sell properties and remit cash to iHeartMedia, which is teetering on the edge of bankruptcy.
Although there is considerable cyclicality to the billboard business, its dividend should stay secure as there is ample free cash flow to cover the dividend even when business is less robust.
We think successful deployment of Lamar’s cash flow, especially given Clear Channel’s challenges, can lead to a continuation of the growth Lamar has exhibited since attaining REIT status.
Five years of 8% growth in both revenue and adjusted funds from operations (AFFO) per share share could result in AFFO of $7.33 per share. A repeat of the average high price/AFFO ratio of 13.6 could lead to a stock price of $100.
Adding in dividends, the total return may exceed 11% annually. If the company succeeds in driving steady growth, there is also upside potential to its very low price to AFFO ratio. The downside risk appears to be 13% to $62, its low price over the past year.
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