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Public Storage's (NYSE:PSA) Stock Is Going Strong: Have Financials A Role To Play?

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Simply Wall St
·4 min read
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Public Storage's (NYSE:PSA) stock is up by a considerable 7.6% over the past month. 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. In this article, we decided to focus on Public Storage's ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. Put another way, it reveals the company's success at turning shareholder investments into profits.

See our latest analysis for Public Storage

How Is ROE Calculated?

Return on equity can be calculated by using the formula:

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

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

15% = US$1.5b ÷ US$9.5b (Based on the trailing twelve months to June 2020).

The 'return' refers to a company's earnings over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.15 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. 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 everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Public Storage's Earnings Growth And 15% ROE

To start with, Public Storage's ROE looks acceptable. Further, the company's ROE compares quite favorably to the industry average of 5.0%. This probably laid the ground for Public Storage's moderate 6.2% net income growth seen over the past five years.

Next, on comparing with the industry net income growth, we found that Public Storage's reported growth was lower than the industry growth of 14% in the same period, which is not something we like to see.

past-earnings-growth
past-earnings-growth

Earnings growth is an important metric to consider when valuing a stock. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. Doing so will help them establish if the stock's future looks promising or ominous. What is PSA worth today? The intrinsic value infographic in our free research report helps visualize whether PSA is currently mispriced by the market.

Is Public Storage Making Efficient Use Of Its Profits?

Public Storage seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 89%, meaning the company retains only 11% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Besides, Public Storage has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 74%. Regardless, the future ROE for Public Storage is predicted to rise to 24% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Public Storage certainly does have some positive factors to consider. Its earnings growth is decent, and the high ROE does contribute to that growth. However, investors could have benefitted even more from the high ROE, had the company been reinvesting more of its earnings. With that said, the latest industry analyst forecasts reveal that the company's earnings growth is expected to slow down. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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@simplywallst.com.