B. Riley Financial, Iron Mountain, Franchise Group: Analysis Of Three 5% Yielders

Table of Contents Total Returns Past 5 YearsMonte Carlo SimulationIRMFRGRILYResults and Conclusions Dimitri Otis/DigitalVision via…

Dimitri Otis/DigitalVision via Getty Images

While reading an article from author Gen Alpha on Iron Mountain (IRM) it occurred to me that the 5% dividend yield, along with some decent share price growth recently may offer investors a good total return. But is that the best investment opportunity right now for that type of investment?

I decided to use several different tools and data sources to compare IRM against two other 5% yielding stocks that have good ratings, and recent dividend increases – B. Riley Financial, Inc. (RILY) and Franchise Group (FRG). RILY at 2.23B and FRG at 2.05B are similar in market cap, while IRM is bigger at a market cap of 12.96B. RILY is in the Financial sector, IRM is an REIT, and FRG is considered Consumer Discretionary.

IRM, being a REIT means that they are required to pay out at least 90% of taxable income annually as a distribution to shareholders. Therefore, some investors buy the stock for its steady income. The dividend payout has been steady and rising over the past 5 years with no cuts, even in 2020 when others were cutting their payouts.

IRM dividend history

IRM Dividend History

Seeking Alpha

RILY is a diversified financial services company that operates through multiple, wholly owned subsidiaries. Back on October 28, when the company reported Q3 2021 results, they announced:

Increases regular quarterly dividend to $1.00 from previous $0.50, declares $3.00 special

That increase brings up the current regular dividend to about 5%, not including the special. RILY was ranked Number 2 on the Fortune list of fastest growing companies in 2021. An article from SA author Double Dividend Stocks sums up the bull case for RILY.

FRG is in the Consumer Discretionary market sector and acts like an REIT but is not classified as one. On December 7, FRG announced a 67% increase of the regular, quarterly dividend, from $0.375 to $0.625. At current market price that amounts to about a 5% yield. They recently acquired Sylvan Learning and Badcock Furniture. Brad Thomas wrote a recent article that you can read to learn more about why FRG is worth a look.

I attempted to compare the 3 picks on Seeking Alpha using the peer comparison option, however, SA has limited information to display with no Quant rating for RILY. Both FRG and IRM get more coverage from both Wal St analysts and SA authors.

peer comparison

Peer comparison – RILY, FRG, IRM

Seeking Alpha

TipRanks offers a smart score view, which ranks the stock based on 8 factors. Both FRG and IRM have a 10 score, which is the best. RILY, again has less data available and a score of 7, still good.

watch list comparison

TipRanks Watch List Comparison

TipRanks

Total Returns Past 5 Years

Using the “peer” comparison option on SA (even though these are not really peers in the typical sense), I could easily see that RILY was the biggest outperformer over the past 5 years. But FRG has been catching up, especially in the past 9 months.

total return comparison

Total Return Comparison

Seeking Alpha

Chart
Data by YCharts

I used the “Backtest Portfolio Asset Allocation” tool on Portfolio Visualizer to look at the past 5 years and compare the 3 stock picks against a benchmark, the Vanguard 500 Index Investor, which is one of the options available.

The chart below shows a back-test analysis comparing RILY, FRG, IRM benchmarked against Vanguard 500 index on a 5-year basis with income generated not reinvested. RILY is the clear winner with FRG a close 2nd.

backtest analysis

Backtest Analysis – Total Return

Portfolio Visualizer

RILY paid more in total income over the past 5 years in terms of distributions, in large part due to the special dividend paid in 2021 but was more or less in line with the others in previous years.

income analysis

Backtest Analysis – Income

Portfolio Visualizer

But which of the 3 is the best going forward? The 3 opportunities have different appeal to investors based on their risk tolerance and objectives. I believe that IRM is a good pick for continued steady income and some capital growth, but not much over the next 5 years. IRM may have less downside risk from the current share price. FRG looks poised to continue its growth trajectory and strong earnings results, however, the share price has shot up recently and could be due for a correction during the next market correction. RILY appears to be growing steadily and very under-valued at the current price, and the recent dividend increase provides optimism for the coming year.

Monte Carlo Simulation

Using PV again, I utilized the Monte Carlo simulation tool with a 5-year forecast based on the Statistical Returns option, since FRG has less than 10 years of historical returns to use.

In this analysis, IRM appears to be the safest choice, with the lowest max drawdown at -55% (-22.45% at 90th), but also the lowest 90th percentile time weighted Rate of Return at +32%.

IRM

IRM Monte Carlo simulation

Monte Carlo – IRM

Portfolio Visualizer

chart of IRM forward simulation

Chart of IRM MC simulation

Portfolio Visualizer

FRG

FRG had the highest 90th percentile ROR at nearly 65% but a high max drawdown in the 10% percentile range of -83%. Worse than IRM, but better than RILY.

FRG simulation

Monte Carlo – FRG

Portfolio Visualizer

chart FRG simulation

Chart – FRG

Portfolio Visualizer

RILY

In the backward-looking backtest analysis, RILY was the clear winner, but in this forward-looking MC simulation it is the worst choice overall. The 90th percentile ROR is 37%, just slightly better than IRM, but the max drawdown in the 10th percentile range is -94% and still -55% in the 90th.

MC simulation RILY

Monte Carlo – RILY

Portfolio Visualizer

chart RILY

Chart – RILY

Portfolio Visualizer

Results and Conclusions

Although this MC simulation is just one attempt at a forecast of future returns, it confirms my belief that FRG would be my first choice of the 3 to add to my NGNG portfolio because of my high risk tolerance for capital growth along with income. If I were a more conservative investor interested in steady income, I would go with IRM. I would not dismiss RILY as an investment though, especially with the recently announced increase in the dividend. The statistical analysis does not take current, unreported events into account.

Nor does this analysis consider other factors that could impact an investment choice. For example, if the economy suddenly goes back into recession and consumers stop spending for whatever reason, that will likely impact FRG the most. Being consumer discretionary means that if consumers do not spend as much, the franchises do not earn as much. IRM may see a slowdown in growth but the impact to them would be less severe. In the case of RILY, their growth would likely slow to some degree, but they are very diversified, and it would depend on how hard the overall financial sector might be affected.

I believe that each stock is worth considering in the industry sector it represents – REIT, Financial, Consumer Discretionary. If you are interested in diversifying your portfolio, I would look to add all 3. For me to decide, I need to wait a couple weeks, or longer perhaps, to see what the market is going to do before I pull the trigger. Meanwhile, I am going to dig a little deeper into each one to try to understand what the future looks like for IRM, FRG, and RILY with respect to current and forecasted market conditions.

Any thoughts or opinions on any of the three stocks from the readers’ perspective would be much appreciated.

Happy investing and be safe out there!