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Safestore Holdings plc seems set to become a top income stock after dividends rise 21%

Storage company Safestore Holdings (LSE: SAFE) continues to perform exceptionally well as Britons – and Parisians – find more reasons to put their property into storage. Its results released today show that it has recorded a third successive year of double-digit earnings growth. This has pushed its dividends almost 21% higher, which means that in the last three years its payouts to shareholders have risen by 100%. Looking ahead, further dividend growth is on the cards.

Building on past performance

The company’s performance in 2016 built on the improvements made to its operating model in previous years. Its like-for-like (LFL) revenue at constant exchange rates increased by 8.1%, with the figure being 9.2% for the UK and 5% for Paris. Its cash tax adjusted earnings per share rose by 19.3%, with its strategy of adopting a balanced approach to revenue management being highly successful.

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For example, LFL average occupancy for the year increased by 3.5%, while LFL pricing growth increased by 4.5% in the UK and by 2.3% in Paris. In addition to strong organic growth, Safestore also acquired 12 Space Maker stores during the period for £42.3m, which immediately enhanced its earnings.

Given its strong financial performance in 2016, there’s scope for further acquisitions in the current year to supplement organic growth. In fact, the company’s balance sheet has a loan-to-value (LTV) ratio of 31% and interest cover of 5.5 times. Alongside a reduction in underlying finance costs, it appears as though more debt could be taken on in future.

Outlook

The outlook for the business is upbeat. There’s a high level of interest in self-storage and this should help Safestore to fill its 1.62m square feet of unlet space. It’s expected to pay a dividend of 12.8p per share in the current year, which would represent a rise of almost 10% versus the 2016 financial year. This puts it on a yield of 3.6%, which is slightly higher than that of the wider index.

Looking ahead, dividend growth may remain high due to the strong performance of the business, but also because its dividends are covered 3.6 times by profit. This shows that there’s significant scope for them to rise over the medium term.

However, this yield is behind that of other income stocks such as Imperial Brands (LSE: IMB). It yields 4.8% and is expected to raise dividends by 8.6% next year. While this is slightly behind the dividend growth rate of Safestore, Imperial Brands offers a more stable and consistent outlook. Demand for cigarettes is likely to remain robust and since the company has exposure to the increasingly popular e-cigarette market, there’s also plenty of growth potential in the coming years.

As such, while Safestore is a sound income stock for the long term, it’s not quite on a level with popular income shares such as Imperial Brands.

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Peter Stephens owns shares of Imperial Brands. The Motley Fool UK has recommended Imperial Brands. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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