Real estate investment trust Public Storage (PSA)
is using its unique position in commercial real estate to rapidly increase the dividend, resulting in a heating up of the stock price. Investors should keep an eye on Public Storage's valuation, therefore, when looking for an entry point.
Public Storage owns self-storage and commercial storage rental properties. The company owns more than 2,200 storage rental properties in 38 states and seven European countries. Total rental space exceeds 140 million square feet.
As a real estate investment trust, Public Storage is required to pay out at least 90 percent of net income to investors as distribution or dividends. Most REITs have a lot of non-cash deductions or expenses, so the support for the current dividend rate is best determined by the reported funds from operations (FFO).
For the first three quarters of 2011, Public Storage reported FFO of $4.19 per share up from $3.39 a year earlier. FFO for the third quarter was $1.29 per share, down from $1.69 in the third quarter of 2010.
The drop for the quarter was due to a 60 cents per share swing in euro-dollar exchange rates. Currency fluctuations are the major cause in FFO fluctuations for Public Storage.
In the first quarter of 2010, Public Storage started to increase the quarterly distribution at a rapid rate. From 55 cents at the end of 2009, the dividend increased to 65 cents per share then 80 cents one quarter later.
For the second quarter of 2011, the dividend was boosted to 95 cents quarterly. The rising dividend indicates increasing cash flow for the company, but the very rapid increase is due to more of the FFO cash flow reaching the bottom line as reportable net income. With higher levels of income, Public Service must pay out higher distributions to meet REIT tax rules.
With the increasing distribution rate, the share price has moved steadily upward as well. The yield on PSA tends to stay in a range of 2.8 percent to 3.4 percent. Investors looking for an entry could wait for a stock price drop to put the yield at the higher end of the range.
Recent analyst communication on PSA include a reiteration of sector perform by the analysts at RBC Capital Markets and a reiteration of a buy rating by Barclays Capital analysts.
The company next reports on Feb. 2.
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