A rare chance to buy one of the best dividend shares on the market?

This is one of the best-performing dividend shares on the London Stock Exchange, and it looks incredibly cheap. But could this soon change?

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Despite the stock market enjoying a much-needed rally this year, plenty of dividend shares are still trading at dirt cheap valuations. In some cases, investors are right to be pessimistic. But in others, short-term headwinds are dragging down market-caps despite long-term potential remaining intact.

That certainly appears to be the case with Safestore Holdings (LSE:SAFE), in my opinion. And based on its latest results, time may be running out to snap up shares at today’s cheap prices.

What’s going on?

As a self-storage operator, Safestore generates revenue by leasing space to individual families as well as businesses. Generally speaking, it’s a relatively sticky business model. After all, even if the economy decides to throw a tantrum, moving things out of storage usually isn’t ideal.

However, when household budgets are stretched too thin, this stickiness starts to wear off. And that’s exactly what we’ve seen over the last two years, with Safestore’s occupancy shrinking from 84.5% in October 2021 to 74.4% as of April.

Obviously, that’s a problem. And while pricing has prevented a massive slide in revenue generation, higher debt servicing costs and inflation have taken a toll on underlying profit margins. Now, pair all this with the downturn in the real estate market due to higher interest rates. Suddenly, a 40% slide in the stock price over the last two years makes a lot of sense. But have we reached the bottom?

The opportunity ahead

As frustrating as it is to watch a company from my own portfolio take a hit, Safestore’s actually in better shape than many believe. The whole self-storage industry has been suffering from occupancy declines, and Safestore’s proven to be notably more resilient than its closest competitors.

At the same time, even with weaker margins, free cash flow generation remains strong, providing ample coverage for dividends. In fact, even in these adverse conditions, management has hiked shareholder payouts once again for the 15th year in a row.

Therefore, dividends don’t appear to be at risk right now. But of course, it begs the question as to when the share price will recover. Sadly, there’s no way of accurately predicting this. Yet, it’s worth pointing out that among the latest results, the group’s property portfolio valuation actually increased.

In other words, the commercial real estate market has started to recover – a trend that’s likely to accelerate once interest rate cuts emerge. With the economy as a whole also ramping back up, the cyclical downturn in self-storage may soon come to an end. It may have even already started, given management expects to return to growth by the end of 2024.

Time to buy?

Even with the slide in its valuation, Safestore’s delivered over 600% total gains to shareholders over the last 10 years. That makes it one of the best-performing dividend shares on the entire London Stock Exchange!

However, even when market conditions improve, there are still risks to account for. This is hardly the last cyclical downturn that Safestore will have to navigate. And with the firm expanding into international territories, it’s opening up to new forms of competition that could impede progress.

Nevertheless, management’s track record speaks for itself. And given its long-term income-generating potential, it might be a good time to top up my existing position. I’m currently considering it.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Zaven Boyrazian has positions in Safestore Plc. The Motley Fool UK has recommended Safestore Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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