In news that will shock absolutely no one, the price of stamps is going up.
Again.
So-called Forever stamps issued by the United States Postal Service (USPS) rose from 73 cents to 78 cents last year. And they’ll rise again this July to 82 cents.
Nor will that be the end of it, as we all know. In fact, Postmaster General David Steiner said just last month that he wants stamps to cost a whopping 90 to 95 cents.
“There are only three things that any company can do to improve financial performance,” he told Congress concerning the Postal Service’s latest credit crunch. “Sell more products, raise prices, or cut costs.”
It’s clear which one he favors.
We all know the Postal Service is a money pit, losing cash almost every year since 2007. And it’s set to lose even more considering the new tentative business agreement it just reached.
Last week, The Wall Street Journal and Reuters broke the story that Amazon (AMZN) will pay USPS to deliver around 1 billion of its parcels per year. That sounds like quite the payload, but it actually represents 20% less than the previous contract.
Amazon has apparently been hard at work since its last negotiations, building out its infrastructure in rural areas – the very places it used to wholly depend on the post office reaching. Moreover, it will continue pushing itself toward a completely autonomous system.
One it could achieve within this decade.
Even so, I’m confident that USPS isn’t going anywhere in the foreseeable future. Even with how poorly it’s run… even with all the ground “snail mail” has conceded to e-mail…
The federal government is too vested in this institution’s existence to let it die away. And if that’s the case, its biggest landlord should do just fine as well.
Backdoor Details to the United States Postal Service
Who actually runs the United States Postal Service is a mystery to many.
Is it a federal government agency? Is it private?
The answer, it turns out, can be summarized in two words: It’s complicated.
From a strictly legal standpoint, the USPS has been a self-financing organization since the Postal Reorganization Act of 1970 went into effect. Though, in typical D.C. fashion, it didn’t lose all traditional taxpayer support until 1982.
Today, it’s run by a business-like board consisting of:
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Nine governors nominated by the president and confirmed by the Senate
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The postmaster general, whom those governors appoint
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The deputy postmaster general, who the other 10 appoint
That structure worked well enough up until 2006, when electronic communications really started taking off. In very poor timing, that’s the same year D.C. ordered the Postal Service to prefund its retiree health benefits, forcing it to pay billions in annual payments that weighed it down even more.
If an actual business had to operate under these conditions, it would have shuttered fast. But the USPS still has its Big Government connections – including a legal responsibility to exist.
The same act that made it a self-funded entity also established its universal service obligation, or USO. To quote USPS itself, this mandate “binds the Postal Service to provide prompt, reliable, affordable, and efficient postal services to all Americans, regardless of where they live.”
So, whenever its expenses add up too much, Congress and various presidents have stepped in to pay the tab. Like when the Postal Service got $10 billion in pandemic relief in 2020. Or when it received a $107 billion overhaul in 2022.
If this were any other entity, I wouldn’t touch it with a 10-foot pole. But considering how the only thing that’s going to shut the USPS down is a whole new and highly improbable law?
I just don’t see it happening.
That’s why I continue to like the looks of a unique real estate investment trust (“REIT”) that owns properties leased to this massive, legally bound institution.
Rain, Sleet, or Snow…
Postal Realty Trust (PSTL) is a REIT that almost exclusively owns properties leased to the United States Postal Service – a setup that works very well for it.
Thanks to that previously mentioned USO, USPS cannot cut costs by shutting down struggling branches. That’s not a legal option, with the federal government deeming them mission-critical infrastructure.
As such, these properties get rental priority. And Postal Realty gets to boast extremely sticky tenancy, with a 99.5% retention rate and a 99.8% occupancy rate.
It also has low capital expenditure (capex) requirements since post offices are simple, functional buildings. I don’t know when you visited one last, but they tend to be pretty plain properties overall.
That no-muss, no-fuss element combined with practically guaranteed rental income produces stable, predictable cash flows investors can appreciate. Because Postal Realty is a REIT, it pays out dividends. And given the nature of its business, those dividends are consistent.
There’s growth opportunity, too, since there are around 31,000 post offices throughout the U.S. Approximately 18,600 of those are privately owned, with Postal Realty owning just 2,200 of them.
So far.
The company aggressively expanded last year, purchasing 216 properties for $123.1 million – a spending spree it’s not done with yet. In fact, it’s on track to acquire another $115–$125 million this year as well.
None of this is to say that PSTL is a high-growth REIT like data-center REITs Equinix (EQIX) or Digital Realty (DLR). But it does present quite the sleep-well-at-night (aka SWAN) setup.
Only seven years out from its initial public offering (“IPO”), it has maintained an investment-grade balance sheet every year. Same-store net operating income (“NOI”) growth sits at 5.5%, with adjusted funds from operations (“AFFO”) per share rising 5.8%.
PSTL currently trades at a modest discount, with a price to AFFO of 14.6 times compared with its normal multiple of 15.2 times. And its dividend yields 5%, with 7% growth forecast this year.
As an investor, you can rest a little more easily with all the stamp price increases, knowing that every time you purchase a new sheet… you’re bound to get some of that back in dividends and more.
Source: Wide Moat Research
Regards,
Brad Thomas
Editor, Wide Moat Daily
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