Data-center operator Switch (SWCH) is a company in transformation, possibly in more ways than one. It's already firmed up plans to become a real estate investment trust (REIT), but its status as a publicly traded stock might end before that occurs.
Switch isn't a major dividend player -- at least not yet. Once it becomes a REIT it will have to pay out at least 90% of its net profit in the form of shareholder dividends. Let's see if we can tease out what might happen to this in each of those two transformation scenarios.
Switched on to growth
Switch is still a growing company, which is probably a key reason it likes to keep its quarterly dividend relatively low (at barely over $0.05 per share at the moment, it yields a wafer-thin 0.7%).
At the moment it operates four primary data-center campuses -- "primes" in Switch-speak. Together, the primes comprise 12 data centers.
As of the end of 2021, these provided services to more than 1,300 customers, many of which are top names in their fields. Alphabet's core Google unit is a client, as is Amazon, fintech star PayPal, and supermarket chain operator Kroger.
With the world still very much in need of the storage capacity data centers provide, Switch is showing some fine growth numbers. In fourth quarter of 2021, Switch's revenue surged 26% year over year to more than $161 million.
Non-GAAP (adjusted) profitability was down by 37%, which isn't ideal, but the company still landed in the black at $4.1 million, against the year-ago $6.5 million.
The revenue growth train should keep rolling. Switch is projecting revenue of $660 million to $674 million this year, which would mean growth of at least 11% over the 2021 figure if realized. The company didn't provide any net income forecasts.
Making the REIT decision
But it's not necessarily performance that will determine the fate of the dividend; rather it's the corporate form Switch will assume in the near future. Last November, apparently frustrated by share price growth that notably lagged that of popular data-center REITs Digital Realty Trust and Equinix, Switch elected to become a REIT by Jan. 1, 2023.
Investors sure liked the sound of that. Witness the share price development of the three companies in the years before Switch's announcement, and in the months since, respectively.
One major reason for this, at the risk of stating the obvious, is that Switch's dividend payout should rise significantly -- assuming it's sufficiently profitable -- after such a transformation.
If that were the end of the story, I would unhesitatingly say the company's payout is not only safe but set for a big lift before long. But that's not the end of the story.
Last week, citing "people with knowledge of the matter," Bloomberg reported that Switch management is "exploring strategic options" in consultation with advisors. These options apparently include a sale of the company, likely taking the company private.
We can understand the lure of this strategy, too. There are precious few big data-center operators on the stock market these days, and go-private sales that have taken them off the stock market have fetched a pretty penny.
A prominent example is Blackstone's roughly $10 billion (including debt assumption), all-cash deal to buy QTS Realty Trust and take it private last June. That price tag represented a meaty premium of around 21% to the company's closing share price the day before the deal was announced.
So it must be tempting for Switch insiders to consider cashing out this way. There are more than a few Blackstones out there, willing to hand over cash at well above market rates to obtain a solid, high-potential operator. And Switch absolutely fits the bill.
Rumors... for now
Since the buyout rumors have only recently bubbled to the surface, it's too early to gauge whether a deal removing Switch from the stock market is a realistic possibility. Again, though, there are clearly eager acquirers out there, so I wouldn't be surprised if it happens.
When a company goes private and is no longer publicly traded, only privileged insiders get to hang on to their holdings. If this happens to Switch, the dividend would be taken off the table for regular investors, who would benefit only from the premium to their share purchase price. That will likely be considerable, however, so if that occurs, it'll be a case of booking a nice profit in lieu of steady dividend income over time.
