This High-Yielder's Wide Moat Is Practically Guaranteed By The Government

Discussion in 'Trading news and analysis (syndicated content)' started by StreetAuthority, Jan 11, 2017.

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  1. StreetAuthority

    StreetAuthority Active Member Official Contributor

    Advertising is timeless, which I find reassuring. Thousands of years ago, the ancient Egyptians painted sales notices on papyrus. In the middle ages, store proprietors employed town criers to help drum up business. And today's store merchants are no different, doing whatever they can to showcase their wares and attract customers.

    Why does that matter? Well, just ask anybody who invested in pocket pagers, answering machines or floppy disc drives. Technological advances can quickly render must-have products and services into obsolete relics. Even landline telephones, a revolutionary marvel in their day, are now facing slow extinction.

    But there will always be demand for advertising that helps connect buyers and sellers. Some of the biggest spenders include auto makers, wireless providers, drug companies and fast food chains. They are always communicating with consumers -- and spending an extraordinary amount of money doing so.


    This is a race -- and taking your foot off the advertising pedal leaves many businesses at risk of being left in the dust by rivals.

    That's why so many spend a nickel or dime (or more) from every dollar of sales on marketing efforts. One of my favorites in the group collects steady income from big names like AT&T (NYSE: T) and Burger King, which in turn supports one of the highest dividend yields in the S&P 500 -- and distributions are about to rise again.

    If You're Looking For Income, Look For Wide Moats
    As long-time readers know, I come from the Warren Buffett school of investing that teaches the importance of economic moats. In the business world, success invites competition, which inevitably erodes profits and drives down industry returns toward the cost of capital. Only businesses encircled by defensive moats can fend off competition, generate sustainable excess returns and create real lasting value for shareholders.

    The wider and deeper the moat (metaphorically speaking) the better protected the company. Buffet prefers them to be nearly "unbreachable". You'll find economic moats surrounding all of the world's greatest, most profitable business… Facebook, Visa, Coca-Cola, Wal-Mart.

    Today, we'll look at another gem in the same vein. It has a completely different business model. But just like the names I just mentioned, it's protected by tall barriers to entry that lock out competition and keep profits at high levels.

    The government itself erected this barrier, otherwise known as the Highway Beautification Act of 1965. This piece of legislation placed strict limits on the installation of new roadside billboards, thus preserving a monopoly for existing owners in many markets.

    That moat has allowed one leader to boost operating profits by 130% over the past five years. And because the company earns far more than it needs to operate, it generously pays one of the market's highest dividends.

    An Under-the-Radar Company You Probably Interact With Every Day
    Have you ever been on a road trip and noticed those familiar blue signs with logos alerting drivers to fuel, food and lodging options for upcoming interstate exits? Well, they weren't installed as a public service -- gas stations, restaurants and hotels pay to advertise their name.

    One company, Lamar Advertising (Nasdaq: LAMR), has been awarded private contracts from two dozen transportation agencies across the country to build and maintain these logo signs. Odds are good you've probably also taken notice of the company's billboards, which can be found along rural highways and busy city streets in 44 states. In total, Lamar owns 325,000 outdoor displays from coast to coast.

    Now before I go any further, I should note that I've saved most of my in-depth analysis on this company for readers of my premium income newsletter, High-Yield Investing. But I'll give you a brief rundown on why I like this company so much that I just had to make it a recent addition to my portfolio.

    Simply put, road signs are wonderful employees. They earn no salary, yet work tirelessly day and night generating rental income.

    Founded in 1902, Lamar has made dozens of acquisitions over the years to expand its operating footprint. Lamar has cultivated a broad base of more than 40,000 local, regional and national advertising customers. The diverse list comprises banks, retailers, hotels, casinos, telecoms and many other groups. Customer concentration is a non-issue. No individual tenant represents more than 1% of revenues, so there is little impact should a particular renter leave.

    A dedicated army of 890 account executives out in the field make sure that Lamar's billboards stay rented. But it isn't a hard sell... With motorists passing by 24 hours a day (particularly in heavily trafficked arteries), advertisers can reach 1,000 adults for an average of just $3.63 -- a cost-effective advertising medium compared to radio, television and print. Strong returns on investment (ROI) ensure that vacant billboards are rare.

    Finally, the company has branched out into transit advertising and now operates 42,000 displays on city buses and inside airports. Here too, it has been awarded multi-year contracts by municipal agencies that give Lamar the exclusive right to lease out advertising space.

    A Dividend That Beats 491 Companies Out Of The S&P 500
    The company hauls in $1.3 billion in annual rental revenue. And it operates light in terms of everyday expenses. The biggest cost ($225 million annually) involves the leasing of land directly below its signs. But Lamar does own 7,100 parcels of land, a hidden balance sheet asset.

    Over the past 12 months, the company has generated $394 million in free cash flow (FCF). That's an impressive amount that provides ample funds to distribute to stockholders.

    For decades, Lamar had no dividend. But that changed in January 2014, when the company argued that its outdoor displays should technically be considered real estate for tax purposes. The IRS agreed, and Lamar was given permission to convert from an ordinary corporation to a real estate investment trust (REIT).

    As a REIT, the company is now required to pass 90% of its taxable income through to investors. Quarterly distributions are currently set at $0.76 per share, or $3.04 annually -- for a respectable yield of 4.5%.

    I should add that dividend payments rose 10% at the beginning of 2016, and the board is expected to approve another 10% hike in early 2017 to $3.32 per share.

    As I mentioned, there is a wide moat protecting this cash-generating business. This competitive advantage will keep profits rolling in for many years to come, which is why I consider Lamar a textbook under-the-radar income pick for my High-Yield Investing portfolio.

    Editor's Note: Lamar is just one of many examples of market-crushing yields I look for each month in High-Yield Investing. If you're interested in getting access to my full portfolio, along with names and ticker symbols -- including my in-depth analysis -- I invite you to go here.

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