Stock Market Plunge: Buy This Dividend Stock Before It Pops

Self-storage REIT Public Storage (PSA 1.03%) announced second-quarter financial results demonstrating its superior position in the self-storage market. The company has industry-leading return on equity (ROE) and frugal capital allocation that could make the stock a long-term winner. Here’s what happened.

The early bird gets the worm

Public Storage recently delivered an encouraging second-quarter earnings report. The report showed that earnings per share jumped a whopping 74% to $3.42 from $1.97 in the second quarter of last year. Total revenue grew 24% to $1.03 billion over last year’s second quarter.

Image source: Getty Images.

As a self-storage REIT, Public Storage reports funds from operations (FFO) or net income minus non-cash items like depreciation, amortization, and gains from real estate sales. FFO, a critical metric for REIT performance, grew by more than 26% in the quarter to $3.99 per share. Same-store operating income margin from stores that have been open for more than a year grew by 1.6% to almost 81%.

Such a high operating margin leads to high return on equity, or ROE, or the profit that a company makes based on shareholder’s equity. ROE can tell an investor how profitable a company is based on the capital it deploys in the business.

On an ROE basis, Public Storage is best in class.

PSA Return on Equity (Annual) data by YCharts.

The reasons for the company’s industry-leading ROE are threefold. First, Public Storage was one of the first full-scale self-storage businesses. Being such opportunists allowed the company to secure the highest margin locations in the U.S., including in metro areas such as San Francisco, Los Angeles, New York, and Miami. Such locations are in prime downtown locations close to densely populated urban areas. Public Storage can charge higher rents than in less desirable locations. Thus, Public Storage’s overall business has a higher margin than secondary and tertiary market participants.

Second, and just as important, Public Storage has used capital frugally throughout the years. The company has relied on a combination of low-interest preferred shares and debt to fund its acquisitions and self-storage development projects. The steady and reliable self-storage business has earned the REIT an ‘A’ credit rating from Standard & Poor’s rating agency, meaning it has a strong ability to repay its debts. Like any other borrower, a higher credit rating allows Public Storage to borrow at the lowest rates.

Lastly, Public Storage relies less on debt financing than its competitors. By having the best locations, the company has higher earnings to invest in new locations and developments rather than relying on borrowing, which brings down ROE.

Is Public Storage a buy right now?

Not only is Public Storage using less debt to fuel its growth, but its debt also came down during the quarter by $135 million. In addition, the company recently announced that it is redeeming $500 million  of its senior notes.

Also noteworthy, the company announced a special dividend of $13.15 per share. For years, Public Storage held shares of PS Business Parks, representing 41% of the company. In April, the company reported that Blackstone Real Estate agreed to acquire PS Business Parks for $7.6 billion, or $187.50 per share. Not needing the capital, Public Storage rewarded shareholders with a special dividend once the deal closed.

Interestingly, Public Storage’s leading industry position may not be reflected in its share price. The stock currently trades at a price-to-earnings ratio of 30 while the sector median is 34 times, meaning shareholders may be getting value at the current share price.

Public Storage’s stingy use of capital and first-mover advantage gives the company a solid position to continue growing and expanding its ROE lead. Long-term, value-oriented investors should have their eye on Public Storage shares.

BJ Cook has positions in Public Storage. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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