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While dividend stocks aren’t often as exciting as growth-based alternatives, they can still go on to deliver gargantuan returns. In fact, most of the top-performing UK stocks over the last two decades have been dividend-paying enterprises with a knack for steadily increasing payouts. One such example is Safestore Holdings (LSE:SAFE).
In recent years, the self-storage operator has seemingly struggled ever since higher interest rates came along to combat inflation in 2022. But before this spanner was thrown into the works, since 2010, shareholders had reaped a massive 1,223% return. That’s an average of 26.5% a year – more than four times what the FTSE 100 achieved during the same period.
Since reaching its early 2022 peak, the stock’s been on a downward trajectory. Higher interest rates have put pressure on its property valuations, funding costs, and investor sentiment, dragging its market-cap down by a painful 53%.
However, while most investors have seemingly jumped ship, I believe not buying Safestore shares today could be a massive opportunity missed. Here’s why.
Here we go again…
Despite the firm’s tremendous performance track record prior to 2022, this isn’t the first time Safestore has been under intense macroeconomic pressure. Today, there are seemingly a lot of parallels between the last three years and the group’s first three years as a public company following the 2008 financial crisis.
Safestore went public in March 2007, which was pretty bad timing for a leveraged real estate business. While the catalyst of the subsequent financial crisis is vastly different compared to what started happening in 2022, the effects are very similar. And three of the most prominent are:
- Increased financing costs.
- Falling property valuations dragging down net asset value.
- Collapsing investor sentiment surrounding REITs.
Consequently, by the start of 2010, the Safestore share price had been slashed in half. Yet despite being a significantly smaller UK-only business with tighter interest coverage margins and much higher balance sheet leverage, management sucessfully navigated the storm. And long-term-focused shareholders were rewarded with market-beating gains.
A terrific time to buy?
Today, Safestore’s a much stronger multinational enterprise with better financial coverage, lower leverage levels, and strong free cash flow generation. But most importantly, it’s led by a seasoned management team who know how to navigate challenging macroeconomic environments.
These traits are arguably how the company’s continued to invest and expand despite all the macroeconomic turmoil. And it’s how the dividend stock has also continued to hike shareholder payouts, despite all the headwinds.
With Safestore only barely scratching the surface of its growth opportunity in Europe, the firm’s depressed share price looks like a phenomenal buying opportunity that hasn’t been seen since 2010. At least, that’s my opinion.
Of course, it’s impossible to ignore the risks and threats today that were necessarily around 15 years ago. Building regulations have changed drastically, which can and have complicated international construction, driving up costs. At the same time, the self-storage market’s now filled with lots of rival companies trying to encroach on Safestore’s territory.
These threats cannot be ignored. But given management’s track record, they’re risks investors may want to consider taking given what this dividend stock could potentially deliver over the next 15 years.
