I’m someone that pays close attention to my surroundings.
My wife calls me ‘attentive,’ and I think it’s a fair assessment given my analytical background.
There’s one thing that always seems to capture my attention.
It’s those giant, bright, colorful shiny billboards that sit on top of every single highway in America.
Ask my wife, and she will tell you about the time that I nearly drove our RAV4 into a pickup truck on Interstate 93 in Boston.
We were heading back from a rural wedding in New Hampshire and only a few miles from home.
And there it was—a half-naked, dinosaur-sized photo of Anna Kournikova (the former tennis player) advertising something…maybe it was Nike or some liquor, I can’t quite remember.
I was too focused on the specter of one of my hall passes hanging over my dashboard.
I called the State Police that week to see if the accident totals in Boston had somehow increased, and they sounded like they wanted to commit me.
So….the moral of the story?
Those highway billboards can be pretty seductive.
The good news is that investors can tap into this seduction; two publicly-traded REITs have cornered over half of the US billboard market.
Let’s dig in.
Seductive Billboard REIT #1: Lamar Advertising (LAMR)
Dividend Yield: 3.7%
Lamar Advertising is the Out Of Home (or OOH) advertising king with a 20% market share. LAMR generates nearly 90% of revenues from billboards, with a smaller percentage from other in-your-face ads you might see in local train stations or airports.
I’m not sure if they were the ones responsible for that Anna Kournikova billboard, but it’s highly likely; the company has over 120 years of operating experience with over 40,000 tenants and 170,000 billboards.
Some of the world’s biggest companies leverage these billboards to get your eyeballs on their products. The five biggest OOH advertisers last year? Apple (AAPL), McDonald’s (MCD), GEICO, Amazon.com (Amazon), and HBO.
And here’s a secret about the billboard advertising market; once you have the rights to a particular billboard location secured, it’s like finding gold at the end of the rainbow.
The reason? Permitting restrictions on billboards are very, very restrictive. Not everyone wants a massive 700 square foot intrusion disrupting their everyday lives. So, once you get it, you have it, but trying to get it is a big challenge.
The shift to digital billboard advertising is a significant change, and LAMR is at the forefront of growing its digital footprint. Of LAMR’s 170,000 billboards, only 3,600 (roughly 2%) are digital. Yet, these digital billboards provide approximately 25% of overall revenues!
Think about the digital billboards you’ve driven by on the highway and how frequently they change with different advertisements.
Digital billboards are much more profitable, but conversions are both time-consuming and challenging from a regulatory perspective.
Thus, LAMR is keen to stick to a conversion rate of 250-300 billboards a year.
LAMR is, of course, in the advertising biz, so there were some pandemic-related effects early on. However, revenues have recovered and are now above pre-pandemic levels.
LAMR has outperformed competitors for one, due to their lower exposure to airport and transit advertising, which hasn’t seen as quick of a pandemic-related recovery in the same way that billboards have.
I think LAMR is an excellent opportunity for anyone that wants to play into the continued digitization of outdoor billboards. Not only is there an opportunity for capital appreciation here, but the company also offers an above-industry 3.7% dividend yield, which had been growing consistently at around a 10% clip pre-pandemic.
Seductive Billboard REIT #2: Outfront Media (OUT)
Dividend Yield: 1.8%
If LAMR is the granddaddy of the US billboard ad market, Outfront Media (OUT) is one of the grandkids, with a smaller but impressive footprint of ~47,000 billboards (about 1/4 the total of LAMR).
OUT also has a higher percentage of revenues generated from transit-based advertisements- (roughly 1/3 of overall revenues), which have seen sluggish demand, as work from home trends have impacted ad budgets targeting public transportation.
In addition, OUT has a national-based focus compared to LAMR, with 42% of billboard revenues generated from big advertisers like Budweiser (BUD) or Pepsi (PEP). LAMR has a more targeted, localized focus, appealing to nearby retailers or restaurants. This localized approach tends to be more immune to any wide economic swings.
Still, OUT is making the same digital advertising transitions as LAMR, with nearly 200 digital billboards expected for conversion this year.
However, because of OUT’s high transit-based advertising exposure (especially in NYC), the stock has lagged LAMR. Yet, there are signs of improvement. Although NYC transit ridership is still over 50% below pre-pandemic levels, it has been ticking up.
This improvement in mobility is good news for OUT, and correspondingly, the latest earnings results showed signs of life for their transit ad business, with revenues expected to grow by 70% in the third quarter.
Thus, value-conscious investors might consider OUT as the turnaround play in the billboard REIT space due to their leverage to big, national advertisers and transit-based advertising. OUT certainly has been priced at a more attractive value; it trades at just 14.3x AFFO, well below LAMR, which trades at 16.4x.
OUT does, however, offer a lower yield of 1.8%, so I’d consider LAMR (3.7% yield) if you would prefer to clip a higher coupon.
These Billboard REITs Are Just Two Examples Of The Great Reset That’s Happening As We Speak
I’m sure you see the “Great Reset” taking hold all around you. The stores and restaurants you drive by today are hurting. How many will actually open on the flip side of COVID?
Meanwhile, the stock prices of “Reset plays” like Amazon (AMZN) and Shopify (SHOP) continue to rise into the stratosphere. This brings us to our big quandary:
The Great Reset is indeed a “thing.” But how do we safely invest in it?
Neither of these darling stocks pays a dividend. Both trade at white-hot earnings multiples. And Amazon in particular is under the federal government’s antitrust microscope.
Many investors are buying shares and hoping they continue higher. No thanks.
If we want to stay on the right side of the Reset, we don’t want to find “the next Amazon.” Instead, we want to look for the stocks—dividend payers, of course—that are providing the “picks and shovels” powering the Reset.
During the gold rush of the 1840s, hordes flocked to California to get rich mining for gold. But the guys who made the real money didn’t actually mine anything. They were the entrepreneurs who sold the “picks and shovels” as well as booze, entertainment options, and lodging to the hapless speculators.
We’re seeing the same phenomenon unfold in 2021. We’ll let the first-level types gamble with their dividend-less Amazons and Shopifys, while we calculated contrarians identify the pick and shovel payouts that:
- Represent dividends likely to follow similar “moonshot” patterns as the digital darlings we discussed above, and
- Sport stock prices that will, in turn, chase their rising payouts higher.
And by the way: The valuations of the Reset-winner stocks we’re considering are quite reasonable, improving our chances of enjoying outstanding, market-clobbering long-term total returns.
That’s too bad for the mainstream financial types who overlook them but just right for us.
Source: Contrarian Outlook
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