Buying PSA for Its Dividend

Quill,

In your search for yield, you buy some really questionable stocks. So let’s begin where a responsible investor should begin if she were interested in buying stocks for their dividend yield, namely, some good, old-fashioned, financial statement analysis.

PSA’s assets barely cover its short term liabilities. So it isn’t the strongest of divvie payers. Its debt to equity ratio has increased from 16% to 67.6% over the past five years, which is understandable, given that money was nearly free due to the Fed’s timidity and stupidity. Its debt does have good coverage provided the business continues to prosper, and that’s where the worries arise. According to Simply Wall Street (SWS), “Public Storage’s earnings are forecasted to decline at -10.4% per annum, while its annual revenue is expected to grow at [just] 2.9% per year.”

My takeaway? The business will survive the present and future economic declines. But that doesn’t preclude PSA cutting its div back to $2 per quarter from it present --and one time only-- $3 per quarter. How likely? Very, very likely given that SWS reports that “With its high payout ratio (134.7%), PSA’s dividend payments are not well covered by earnings.” Do the math. If earnings decline, the payout ratio will increase. But earnings aren’t forecast to increase by enough to provide 100% coverage. Ergo, the div will be cut for the common, but not the preferreds, because those can’t be cut, only postponed, because their divs are cumulative.

Under a best case scenario of PSA not cutting its div back to $2 from its present $3, and given its present stock price of $292 and change, the projected dividend yield is a laughably low 4.11%. And just in case you still want to pretend that you don’t understand what the term ‘dividend yield’ means, let me put it to you differently. You’re willing to put $292 at risk in order to receive an income stream of $12 annually. But if you were to put that same amount of money to work in T-Bills, then your income stream would be about $15.

So, which is the better choice? and the same income difference applies if you’d buy nearly any of PSA’s currently-trading, preferred stocks, due to most of them trading at substantial discounts to par. Yeah, yeah. Explaining that claim would require more bond math. But, trust me. I know what I’m talking about from 20 years of trading in the bond market where it’s all about yield relative to money put at risk.

Quill, you’re the real thing, the best discretionary trader I know. But your understanding of fixed-income investing --of which buying common stocks (or preferreds) for their dividends is simply a part of-- sucks majorly. If you want to own PSA for its div, then do so. But don’t try to tell anyone else that it’s a good idea.

Arindam

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