The FTSE 250 is home to many promising stocks. And as a long-term investor, I’m constantly seeking to buy and hold high-quality shares for years, or even decades.
Finding companies of this calibre is easier said than done. And while the easy option is to just stick with the most widely-followed enterprises, these seldom deliver market-beating returns. That’s why Safestore (LSE:SAFE) is currently near the top of my personal ‘buy’ list.
Let’s take a closer look at this business and why investing today could lead to impressive wealth in 10 years’ time.
Self-storage is a cash cow
Safestore’s business model is exceptionally basic. The group buys ideally-located real estate to convert or build a collection of secure lockers where families or businesses can store their excess belongings. A small portion of the revenue stream stems from selling contents insurance. But the bulk originates from collecting rent on a square foot basis.
Needless to say, leasing storage space is hardly the most thrilling-sounding business. Compared to a young biotech firm curing cancer, it’s downright dull. But in my experience, boring companies can often turn out to be exceptionally lucrative. And their lack of popularity also makes them more likely to be underpriced.
Case in point. Since 2013, this FTSE 250 stock has successfully increased its dividend by 400%! The slow but steady expansion of its real estate empire across the UK and Europe has drastically bolstered cash flows and operating profits. This capital, in turn, is used to expand its property portfolio and shareholder payouts in a circle of wealth building.
Over the last decade, investors have reaped a total return of approximately 780%. On an annualised basis, that’s a gain of 24.3% – more than double the FTSE 250’s historical average of 10.6%!
Despite this stellar performance, the self-storage industry remains highly fragmented, especially in places like Belgium, Netherlands, and Germany. So it comes as no surprise management has just begun expanding into these regions. If it can replicate its UK performance abroad, then the next 10 years could be just as lucrative, in my opinion.
FTSE 250 stocks are still risky
Despite being one of the UK’s leading indices, the FTSE 250 is ripe with volatility. Stocks can rise and fall in a relatively short space of time. And Safestore is no exception. In fact, since the start of 2023, shares are down roughly 10%.
Real estate is often incorrectly characterised as a safe investment. But like many other industries, the property sector operates cycles. This illusion of safety partially stems from the fact that these cycles tend to be much longer. And following the last decade of near-zero-percent interest rates, being a landlord has proven quite lucrative.
With interest rates unlikely to fall back to previous low levels, it could be challenging for the firm to replicate its past performance. After all, acquiring or converting properties isn’t cheap. And with the cost of debt rising, management may have to slow its pace to avoid compromising its impressive dividend.
Nevertheless, I don’t foresee the demand for self-storage to disappear anytime soon. And with Safestore trading at a P/E ratio of just 6.7 despite its industry-leading status, this FTSE 250 stock looks like a bargain for my income portfolio.
