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Public Storage's (NYSE:PSA) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

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·4 min read
In this article:
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  • PSA
  • PSA-PF
  • PSA-PG
  • PSA-PH
  • PSA-PI
  • PSA-PJ
  • PSA-PK
  • PSA-PL
  • PSA-PM
  • PSA-PN
  • PSA-PO
  • PSA-PP

Public Storage's (NYSE:PSA) stock is up by a considerable 11% over the past three months. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Particularly, we will be paying attention to Public Storage's ROE today.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

Check out our latest analysis for Public Storage

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Public Storage is:

17% = US$1.5b ÷ US$9.1b (Based on the trailing twelve months to June 2021).

The 'return' is the amount earned after tax over the last twelve months. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.17 in profit.

What Is The Relationship Between ROE And Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Public Storage's Earnings Growth And 17% ROE

At first glance, Public Storage seems to have a decent ROE. On comparing with the average industry ROE of 5.5% the company's ROE looks pretty remarkable. Given the circumstances, we can't help but wonder why Public Storage saw little to no growth in the past five years. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

As a next step, we compared Public Storage's net income growth with the industry and were disappointed to see that the company's growth is lower than the industry average growth of 9.0% in the same period.

past-earnings-growth
past-earnings-growth

Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Has the market priced in the future outlook for PSA? You can find out in our latest intrinsic value infographic research report.

Is Public Storage Using Its Retained Earnings Effectively?

Public Storage seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 88%, meaning that the company retains only 12% of its profits. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was miniscule as a result of the high payout.

Additionally, Public Storage has paid dividends over a period of at least ten years, which means that the company's management is determined to pay dividends even if it means little to no earnings growth. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 63% over the next three years. As a result, the expected drop in Public Storage's payout ratio explains the anticipated rise in the company's future ROE to 34%, over the same period.

Summary

Overall, we feel that Public Storage certainly does have some positive factors to consider. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. With that said, the latest industry analyst forecasts reveal that the company's earnings are expected to accelerate. To know more about the latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team (at) simplywallst.com.