Public Storage Inc: Outstanding Shares Outpace Revenue Growth

| About: Public Storage (PSA)

Public Storage Inc (NYSE:PSA) has commanded a high multiple for as long as I can remember. The simplicity of this business attracts all sorts of investors. Capital requirements are high thus thwarting new competition. A dividend payout record envied by other REITs has buoyed this stock to P/E multiples unprecedented in the real estate segment.

2006 saw a sharp earnings decline, rooted in the Shurgard acquisition in Q3. Outstanding shares increased from 140M to 170M. At the current dividend payout rate of $2.00, PSA will pay out $340M in 2007. As mentioned above, investors love the dividend record. The yield is only 2.1%!

The sustainability of the current payout rate is problematic. I am referring to net income, not operating income. Net income declined from $450M in 2005 to $312M in 2006. At an estimated $505M (excluding Shurgard related charges) less $340M in dividends, PSA is messing with the magic formula that enabled high sq. foot growth rates over the years. Without a 17% to 27% sq. ft. growth rate, P/E multiples are going to come down. Perhaps PSA is banking on inflation and rental increases.

Estimated 2007 EPS is only $1.75, not $3.75 as the stock price would suggest for a 9% to 14% revenue growth rate.

In short, 2007 is probably the last year of 25% to 30% revenue growth. From 2008 onward, we anticipate a return to a more modest revenue growth rate between 9% and 14%.

Investors love the margins and steady dividends in this business, so don't expect a forward P/E multiple of 25. Forward P/E of 40 to 60 is more likely.

PSA 1-yr chart

Disclosure: No conflicts.