With the stock market reentering bear market territory, many investors are concerned about making new investments. Sitting on the sidelines waiting for things to recover may seem like a smart play, but in reality you are missing the chance to diversify your portfolio and invest in high quality companies at a discount.
Real estate is particularly attractive right now because it offers a hedge against today's high inflationary environment and some reprieve from market turbulence. While there are several great real estate stocks and real estate investment trusts (REITs) to choose from, if I could only buy one real estate stock right, it would be Public Storage (PSA 0.48%). Here's why.
Built for turbulent times
The self-storage business model is centered around turbulence and transition. Things like death, divorce, downsizing, and relocation are what drive customers to want or need storage space, meaning the public storage industry is well positioned to withstand an economic downturn -- something many feel is coming.
Since Public Storage is the largest self-storage REIT in the country with a portfolio of over 2,800 storage facilities across the United States, its footprint puts it in a great position to further dominate the industry. But what sets Public Storage apart from its peers is its outstanding financial position.
Despite spending $7.4 billion in acquisitions and developments over the last two years, compounding its growth exponentially, its debt remains low at four times its preferred equity and debt to earnings before interest, taxes, amortization, and depreciation (EBITDA), which is below the industry average of five times. It's also got $940 million in cash and cash equivalents on hand. It has several developments underway that should continue to bump up its revenue, net operating income, and funds from operation (FFO), an important metric that illustrates profitability of a REIT.
Fair price
Public Storage hasn't been immune to the recent market volatility. Share prices are down 20% year-to-date, and down 29% from recent highs. This slump isn't due to anything the company directly did -- in fact, its first-quarter earnings for 2022 were incredibly strong. Rather it's the general concern over where the market is headed that has pushed prices down. The good news is that the company is trading at a favorable valuation.
Share prices at the time of writing are around 18 times the company's FFO. For REITs, prices trading between 20 to 30 times FFO is usually considered a fair valuation, so today's discounted price is a great deal for new investors.
It pays dividends too
Since REITs are required to pay 90% of taxable income in dividends, nearly all REITs are reliable dividend stocks. Public Storage being no exception. The company has maintained a steady dividend payment of $2 per share per quarter for the past four years.
While a lot of investors look for consistent dividend increases, which improve your overall yield, I like that Public Storage has remained conservative with its payouts, which is one of the contributing factors to its superior financial position. Its low payout ratio of 52% also means a dividend cut isn't very likely, even if the market were to worsen. Right now, its dividend yield sits just under 2.7%.
I've been waiting for a market correction to invest in Public Storage, and will certainly be using the recent drop as a buying opportunity once it clears trading restrictions.
