When you purchase a stock you are purchasing a stream of future cash flows, specifically price appreciation and dividends, which are the elements of total return, asserts Kelley Wright; here, the editor of Investment Quality Trends reviews two growth and income ideas for value investors.
The total return you actually receive is determined by what point in the stock’s cycle you make your purchase. Obviously, we want to buy when the stock offers the maximum upside, which means you must have a reference point that indicates historically whether the stock price is high, low, or somewhere in between.
In our approach we use the historically repetitive areas of high and low dividend yield to make this determination, and attempt to limit purchases within 10% of its repetitive high yield area.
Extra Space Storage (EXR) and Life Storage (LSI) combined on July 20 and will trade as Extra Space Storage (EXR). With the “new” EXR now owning LSI’s dividend history, and the combined company is now a behemoth in the REIT sector, EXR has joined the Select Blue Chip roster replacing LSI.
Extra Space Storage owns, manages, develops, and leases self-storage properties. EXR closed its initial public offering (IPO) in August 2004 and has been in the self-storage business since 1977.
On July 20 EXR closed the acquisition of Life Storage, making EXR the largest self-storage operator in the U.S. on a total unit basis, a competitive advantage in an industry where economies of scale are a crucial differentiator.
Pro forma projections for the combined company are a 50% increase in system wide stores with 1,891 wholly-owned stores, 459 joint venture stores, and 1,186 managed stores for a total of 3,536 stores.
With the acquisition the company will have a greater presence in the growth markets of Texas, Florida, and the Southeast, and a reduced presence in California, Hawaii, the Mid-Atlantic and Midwest regions.
EXR receives management fees for managing stores owned by third parties and unconsolidated joint ventures. Management fees were approximately 4.4% of total revenue for 2022.
While not a significant portion of revenue so far, the acquisition should boost this revenue source and all managed properties carry the Extra Space name, which helps strengthen its brand. EXR also receives revenue from selling tenant reinsurance; this comprised 10% of total revenues in 2022 and is expected to increase post-acquisition.
The self-storage business is subject to seasonal changes with more revenue in May through September and the highest level of occupancy usually at the end of July and the lowest level of occupancy generally in late winter (late February through early March).
Occupancy has been strong following the Covid-19 pandemic, however, reaching 94.2% at year-end 2022 versus 95.3% at year-end 2021. This remains well above pre-Covid year-end 2019 levels of 92.8%. I expect EXR to increase its dividend back to pre-acquisition levels as the synergies and economies of scale for the acquisition are realized.
Kimberly-Clark Corp. (KMB) has just returned to the Undervalued category. The 97% payout ratio and P/E of 27, which are based on GAAP accounting, looks ugly. A look under the hood at its cash flow metrics tell a different story, however.
Kimberly-Clark sells consumer, personal, and professional products globally, and is best known for brands such as Kleenex, Scott, and Huggies. The company’s products are sold in more than 175 countries and territories. 48% of sales originate in the U.S., with no other country accounting for more than 10% of net sales in the past three years.
Walmart (WMT) is KMB’s single largest customer. KMB has 83 manufacturing facilities in 33 different countries. 28 facilities are in North America and the remaining 55 facilities are located outside North America.
KMB focuses heavily on the manufacturing of products made from natural or synthetic fibers for its tissue-based products, accordingly, raw materials and commodity costs are particularly important to the company.
Like many of its competitors, KMB increased prices to offset inflation costs and to protect their margins. However, KMB initiated price increases earlier than their competitors, which resulted in higher price spreads between KMB’s products and their competitors. As KMB’s price increases were primarily in 2022 when inflation was still climbing consumers opted for lower prices and/or smaller purchases.
You don’t have to be an analyst to understand the loss of market share, which impacts sales volume. Sales growth for a period, then, was due to price increases. Ouch. Competitors have been playing catch up with prices, which has reduced to spreads in product prices.
The company also reports their costs have been coming down, which will benefit the company’s margins. KMB’s economic earnings for the trailing twelve months are $5.15 per share versus the $4.85 reported GAAP earnings, and their ROIC is just below 15%. Both measures are in the top quintile. The free cash flow yield and present value ratio are in the second quintile, which makes for an overall attractive profile.
In IQ Trends speak, KMB is an overall 2 in a 1 to 5 ranking system. Lastly, KMB is a member of the S&P Dividend Aristocrat Index, has paid a dividend for 89 years, and has increased the dividend for 52 years.