Public Storage: “Preferred” Profits

09/03/2014 9:00 am EST

Focus: STOCKS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

I've been nagged lately by the possibility that the Fed's meddling may cause a long-term deflationary environment where low interest rates and low market returns are the norm for years.

If my fear that the Fed is really flattening the economy is right, our preferred and high yield stocks should do very well. Here, we are buying the Public Storage 5.90% Cumulative Preferred Share of Beneficial Interest, Series S (PSA-PS).

Public Storage (PSA) is a real estate investment trust that owns and operates self-storage facilities in the United States and Europe for personal and business use on a month-to-month basis.

This company has been a growth and dividend champ for more than a decade. The common stock of Public Storage is up more than four-fold in the last ten years. Its balance sheet is a monolith, with very low debt and interest coverage well over a hundred times.

Unfortunately, the common is selling at 35-times trailing earnings with growth only expected to be in the 6% range this year. So, for now, we'll buy the preferred and hope to get the common at a much better price down the road.

Meanwhile, the preferred dividends are covered more than ten times by free cash flow. The shares are redeemable in January of 2017 at $25 per share, which was the stock's closing price on Friday. If that happens, the yield to redemption will be about 5.4% compounded annually.

Note that REITs do not get the reduced dividend rate, so this stock is best utilized in a tax-deferred account. As with all preferreds—be careful to get the right stock—as there is more than one class. Also, buy with a limit order since the float on most preferred stocks is small.

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