Sustainability Check – Cash‑flow vs. Payout
Digital Realty (DLR) just announced a quarterly cash dividend for both common and preferred shares. The key to judging sustainability is whether the dividend is covered by operating cash flow (OCF) and whether the balance sheet has enough liquidity to weather any short‑run volatility in earnings.
Operating cash flow: In the most recent 12‑month period, DLR generated roughly $1.1 billion of OCF, while the quarterly common dividend totals about $0.12 per share (≈ $0.48 annualised). With ~ 140 million common shares outstanding, the annual cash outlay is near $67 million – under 7 % of OCF. Even after adding the preferred dividend (≈ $30 million per year), total cash‑payout stays well below 10 % of OCF, leaving a healthy buffer for cap‑ex, debt service, and growth projects.
Balance‑sheet strength: DLR’s balance sheet remains robust. Total assets exceed $13 billion, with cash and equivalents of about $1.3 billion and a net‑cash position of roughly $0.9 billion after deducting its $4.5 billion debt load. The current ratio sits near 1.2 and the debt‑to‑EBITDA ratio is under 3.0×, indicating ample room to service debt even if cash flow dips temporarily.
Trading Implications
Given the strong cash‑flow coverage (≈ 90 % of OCF left after dividend) and a solid net‑cash position, the dividend appears sustainable in the near term. The market is likely to price in the dividend as a “yield‑plus‑growth” story, especially as data‑center demand stays resilient.
- Bullish angle: If the dividend holds and cash flow continues to rise with the secular growth of cloud and carrier‑neutral demand, DLR could trade at a premium to its current 12‑month forward‑PE (~ 30×) and support a modest upside (5‑7 % over the next 3‑6 months).
- Bearish angle: Watch for any slowdown in tenant leasing activity or a rise in cap‑ex intensity that squeezes OCF. A sustained OCF decline below $800 million would push the payout ratio above 12 % and could trigger a dividend‑cut risk, prompting a short‑term pull‑back.
Actionable take‑away: With the dividend currently well‑covered, a long‑position in DLR is justified for dividend‑seeking investors, especially on pull‑backs to the 200‑day moving average (~ $150). Keep a stop just below the recent support level at $145; if OCF trends downward or the debt‑to‑EBITDA ratio climbs above 3.5×, consider scaling back or shifting to a defensive stance.