Public Storage: A Momentum Company That Is Overvalued

| About: Public Storage (PSA)

Summary

Public Storage total return outperformed the DOW average for the 38.6 month test period by 57.83% which is great.

Public Storage stock price has been on a tear but has a price to FFO ratio of 28 compared to its Forward FFO 3 year CAGR of 6%.

For a REIT the dividend is low at 2.5% compared to other REIT's and just meets the average dividend of the market.

This article is about Public Storage (NYSE:PSA) and why it's a momentum investment that's being considered for The Good Business Portfolio. Public Storage is a real estate investment trust (REIT) that's principal business activities include Domestic Self-Storage, European Self-Storage and Commercial storage. The Good Business Portfolio Guidelines, Total Return, Last Quarter's Earnings, Company Business and Takeaways and Recent Portfolio Changes will be looked at.

Good Business Portfolio Guidelines

Public Storage passes 9 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive, momentum, and growing companies that keeps me ahead of the Dow average.

Public Storage is a large-cap company with a capitalization of $46.7 billion. The Company has direct and indirect equity interests in self-storage facilities in the United States operating under the Public Storage brand name. The Trust has around 49% equity interest in Shurgard Self Storage Europe Limited (Shurgard Europe). A competitor of Public Storage is Extra Space Storage Inc. (NYSE:EXR) with a capitalization of $10 Billion a much smaller company that has good total returns that also the beat the DOW average but will not be considered because of its size. A large cap company like PSA has the muscle to fix problems if they should occur so I stay with PSA a much bigger company as a possible choice.

Public Storage has a dividend yield of 2.5% which is average for the market. The dividend has been increased for 8 years out of the last ten years and its dividend is very safe. Public Storage is therefore not a good choice for the dividend income investor but is right for the momentum investor with its great total return that is also willing to take the risk of overvaluation. The average payout ratio is very high at 104% over the past five years. Looking at the FFO there is approximately $2.00/share left over after paying the dividend leaving plenty of cash remaining for investment in new company purchases and possible future stock buy backs.

Public Storage cash flow is good at $2.00/share FFO after paying its dividend. This cash leaves Public Storage with cash left over for company investment. Public Storage each year buys roughly 20 small storage companies to continue its expansion.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.2% of the portfolio as income and I need 1.8% capital gain in addition for a yearly distribution of 5%. Public Storage has a three-year CAGR of 6% just meeting my overall requirement. Looking back five years $10,000 invested five years ago would now be worth $29,400 today ( from S&P Capital IQ). This makes Public Storage a good investment for the momentum investor with the addition of a average dividend in the growing storage business.

Public Storage S&P Capital IQ has a three-star rating or hold with a price target of $255.00. This makes Public Storage fairly priced at present and a risky choice for the momentum investor because of its high evaluation of price to FFO of 28. It's my opinion that the target price of $255 is much too high and look for a price closer to $210.00 as an entry point.

Total Return and Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of The Good Business Portfolio. Public Storage had much better total return than the Dow baseline in my 38.6 month test period. I chose the 38.6 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the small loss year of 2015 and the losing year of 2016 YTD to see how the company does in good and bad markets. I have had comments about why I do not compare the total return to the S&P 500 average. I use the Dow average because the Good Business Portfolio has six Dow companies in it and is weighted more to the Dow average than the S&P 500. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. This good total return for Public Storage makes it appropriate for the momentum investor that also wants a fair dividend to keep even with inflation but is a bit overvalued.

DOW's 38.6 month total return baseline is 34.30%

Company Name

38.6 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Public Storage

92.13%

+57.83%

2.5%

Click to enlarge

Last Quarter's Earnings

For the last quarter Public Storage reported earnings on February 16, 2016 that beat expected at $1.74 compared to last year at $1.23 and expected at $1.71. Revenue increased at a 6.6% rate, a little less than the previous quarter at 6.7%. This was a good report showing above average steady growth of earnings year over year. Earnings for the next quarter will be release in mid May and are expected to be at $1.49 compared to the last year at $1.23. The earnings continue to grow each quarter as the company continues to buy new storage companies and expand at a slower rate than in the past.

Business Overview

Public Storage (the Trust) is a real estate investment trust (REIT). The Trust's principal business activities include Domestic Self-Storage, European Self-Storage and Commercial. The Trust acquires, develops, owns and operates self-storage facilities, which offer storage spaces for lease, on a month-to-month basis, for personal and business use. It has direct and indirect equity interests in self-storage facilities in the United States operating under the Public Storage brand name. The Trust has an around 49% equity interest in Shurgard Self Storage Europe Limited (Shurgard Europe), which owns approximately 192 self-storage facilities (10 million net rentable square feet of space) located in seven countries in Western Europe operated under the Shurgard brand name. The Trust has an around 42% equity interest in PS Business Parks, Inc. (NYSE:PSB), a publicly held REIT, which owns and operates around 28.6 million net rentable square feet of commercial space. Public Storage has been growing quickly but looking forward it's difficult to see what will drive future growth at the past pace.

Takeaways and Recent Portfolio Changes

The Public Storage is a good momentum choice considering its high total return over performing the Dow average, but has a very high price to FFO ratio of 28 making it risky going forward. The good Business Portfolio will wait for a better entry price if it ever occurs.

The momentum investor has a reasonable entry point to a company that has growth going forward for years , but not as much as the past few years. If you don't already have a position in the storage business Public Storage may be worth a position for your momentum risk segment of your portfolio if you have the nerve.

Sold some covered calls on Cabela's (NYSE:CAB) for income while we wait for the takeover and the next earnings report. Sold April 50's at $1.68, and will buy them back if the premium drops to $0.32. As of 3/21/16 April 50 CAB calls are $0.50. Taking 80% of the premium allows another trade in the same month if CAB suddenly goes up after buying the calls back.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Home Depot (NYSE:HD) is 8.2% of portfolio, Johnson and Johnson (NYSE:JNJ) is 8.3% of the portfolio, Altria Group Inc. is 7.4% of the portfolio, Boeing (NYSE:BA) is 8.2% of the Portfolio and L Brands (NYSE:LB) is 6.9% of the portfolio, therefore HD, BA and JNJ are now in trim position with Altria Group Inc. (NYSE:MO), L Brands Inc. getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the last quarter earnings call.

For the total Good Business Portfolio see my recent article on 2015 fourth-quarter performance for the complete portfolio list and performance.

I have written individual articles on CAB, JNJ, EOS, LB, GE, IR, MO, BA, Omega Health Investors (NYSE:OHI) and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, HD, CAB, JNJ, LB, MO, OHI, IR, GE, EOS.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.