Iron Mountain Incorporated (NYSE: IRM) is further capitulating to Elliott Management in an activist move.  Its CEO left under pressure last week and the restructuring addresses what Elliott had previously proposed in a move to a real estate investment trust for a much higher dividend.  This may be chump change for a man like Warren Buffett, but Berkshire Hathaway Inc. (NYSE: BRK-A) left about 50% profit on the table here by selling out of this one far too soon.

The company is forming a special committee to evaluate its financing, capital, and tax strategies, including conversion into a REIT.  The payouts look to be high as it has committed to a payout of $2.2 billion through 2013, with some $1.12 billion returned to shareholders in the next 12 months via stock repurchases and dividends.

Return on invested capital is now seen as being 11% after tax in 2013 versus about 7.7% in 2010, leaving much room for dividends (and/or buybacks).  It simultaneously is seeking lower capital spending and higher margins.

The company has already announced a $350 million buyback plan and a 200% dividend payout boost that will come to $0.75 per share per year.  The current yield is 2.2% but that is now that shares have jumped up to a new near-term high of $35.00 after nearly a 4% gain today.

Where this will get interesting is if Iron Mountain chooses to leverage itself up higher.  This 2.2% yield is no longer exactly one of the highest yields out there.  The company may be able to boost its dividend to an annual payout of $1.25 per year by the end of 2012 if it lives up to what analysts expect.  If it can milk out more income due to cap-ex cuts and due to streamlining operations, then that payout be even higher.  Let’s use $1.50 for a theoretical payout.  Investors would get a yield based upon today’s price of just over 3.5% at a $1.25 payout based upon today’s price, but investors would get a yield of almost 4.3% at a $1.50 payout.

Keep in mind that these payouts could be higher and could be lower.  While the conversion to a REIT is mentioned, there are probably no assurances that such a move is locked in.  It would seem a logical move, but we have seen the market interrupt more restructuring plans to always know that there is no free lunch.

There are some risks and opportunities here as well.  The company is evaluating its digital business strategy as part of the move.  It is also fine tuning its international and domestic markets where it can have a leadership position or already has a #1 or #2 position in market share.  That means that growth could come just as easily as divesting assets in many markets.  That brings risk and opportunity.

One last thing for investors to consider here is that much of the great benefits of this restructuring have already been realized.  Shares were around $25,00 as recently as early March.  Shares then went to $28.00, then to $30.00 and higher.  Now we are at $35.00 for a gain of 40% in about six weeks at the same time that stocks have gone from hot to choppy.

Much depends here upon how much more value can be milked out of the company.  And much of the gain has already been realized.

JON C. OGG

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