Realty Income (O) Dividend Stock Analysis – REVISITED

If you want to talk about how fast time flies, here is a perfect example.  I was prepared to re-visit a dividend stock analysis that I thought I performed over Realty Income (“O”) a couple of quarters ago.  When I looked at the date on the original analysis…it was November 2015.  I cannot believe 12 months have flown by that quickly…where has time gone?   Even though I have reviewed the company in the past, I thought it would be a good idea to update the stock analysis I performed considering the recent pullback in price, the fact that they were one of the four stocks on my October Watch List, and the company’s recent earnings release.  A lot can change over 12 months, I think we can all attest to that in some capacity.   So let’s re-run Realty Income through our stock screener.

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Realty Income’s (O) Earnings Release

At the end of October, Realty Income (O) released their 3rd quarter earnings.   This quarter, there was a lot to like with the company’s operating results and here are some of the highlights.   Net Income and FFO (the non-GAAP metric preferred when assessing REITs), both grew when compared to the same period in the prior year.   In September, the company increased their dividend once again, continuing their consecutive quarterly dividend increase streak (76 consecutive quarters) and marching their way towards Dividend Aristocrat status.  Not only does the company continue to increase their dividend, the increase in net income/FFO should allow the company to continue to increase their dividend going forward.

Besides for the earnings results and dividend increasing, the company’s cheap access to capital and the volume of investments in new properties caught my attention in a very positive way.  Here is the quote from John Case, the company’s CEO, about the new investments and access to capital:

“During the third quarter, we completed $410 million in high-quality acquisitions at attractive investment spreads to our cost of capital. Year-to-date, we have completed approximately $1.1 billion in acquisitions and we continue to see an active pipeline of investment opportunities. As a result, we are raising our 2016 acquisitions guidance to approximately $1.5 billion from our prior estimate of $1.25 billion…

“In October, we successfully accessed the capital markets, completing a $600 million, 10-year senior unsecured bond offering at an effective yield to maturity of 3.15%, which is the lowest yield we have achieved in our company’s history for a 10-year bond offering. We believe the pricing of the transaction reflects our excellent financial condition and the favorable outlook for our company.”

How could you not get excited when reading a quote like that?  We all know that the current interest rate environment is very low right now; heck, I’m learning this first hand as my wife and I begin the process of buying our first home.  After reading more about the properties that Realty Income (O) invested in during the quarter, it was stated in the earnings release that the company purchased 93 properties, in 23 states, and have tenants in 13 different industries.  Further, the properties ares 100% leased with a weighted average life of the lease of 15.4 years!

I think I can quickly summarize my take on this earnings release, so please let me know if I am interpreting this incorrectly.  The company is taking advantage of record low-interest rates to invest in a highly diversified, long-term property and tenant base with high occupancy rates that should allow the company to continue to grow their net income/FFO.  In turn, this should provide the company with the tools to continue their dividend income streak going forward.  Again, please let me know if you have a different take on all of this!

Revisiting REalty Income’s (O) Dividend Stock Analysis

If Lanny and I just invest based on strong earnings reports, we would have incurred a lot of transaction fees.  No, here on this website, we try to find the undervalued dividend growth stocks that have shown their ability to pay a growing dividend over the long haul.  That’s the name of the game here!   Remember, I performed a dividend stock analysis over this company last year.  So I will be comparing the current metrics versus the company’s position 12 months ago as discussed in our earlier article.   Plus, I will update as fit.  Time to re-run Realty Income (O) through the Dividend Diplomats Stock Screener.

  1. Price to Earnings FFO below S&P 500 – Last year, I calculated O’s Price per AFFO as 17.18X using their 2015 third quarter earnings results.  For this year, I’ll use the company’s earnings guidance (2.87 per share using the low-end of the guidance range) per the earnings release for the same analysis.  Using the 10/28 closing stock price, that would result in a Price per AFFO of 20.39X.  The price per AFFO has increased compared to last year, but it is still lower than the PE ratio of the S&P 500.  I know the last comparison to the S&P 500 isn’t quite an apples to apples comparison considering the difference between net income and AFFO, but it is worth highlighting this for the purposes of the analysis.  I think it is interesting thought that the metric increased for Realty Income over the last 12 months.  But it doesn’t surprise me considering the stock is up ~20% over the last 12 months, I guess that was bound to happen!
  2. Payout Ratio Less than 60% – The payout ratio isn’t the most applicable metric given the structure of a REIT and the requirement to pay out a large percentage of their earnings.  The dividend to AFFO ratio is greater than 60%; however, the company continues to grow both their dividend and AFFO.    I would be concerned here if the company’s dividend grew and their AFFO turned south; however, as discussed in the earnings section above, that is clearly not the case.
  3. History of Increasing Dividends – I think we all have figured out by this point of the article that Realty Income (O) has a strong track record of increasing their dividend!
  4. Dividend Growth Rate – In my initial analysis 12 months ago, I stated that the 3 and 5 year DGR for Realty Income (O) was 9% and 6%.  Based on their earnings release, the company’s dividend has increase 5.4% since September 30, 2015.  This is in line with their 5 year DGR but lower than their 3 year DGR.
  5. Dividend Yield – This one fascinates me and it shows just how crazy Mr. Market has been over the last 12 months.   In my earlier analysis, Realty Income’s (O) dividend yield was 4.82%.  Now, their dividend yield is 4.2%.  I mentioned the price has appreciated significantly since the time of my last analysis, so a shard decrease in the yield is a side effect of the appreciation in price.  Still, the 4.2% yield would increase my portfolio’s average dividend yield and push me closer to hitting my goal of having $3,250 in annual dividend income before the end of the year.

Summary – Realty Income (o)

Is Realty Income the cheapest stock?  No.  Heck, it is more expensive than it was at the same time last year.  However, you are paying for the quality you are receiving and the company appears stronger today that it was 12 months ago.  To me, Realty Income should be considered one of those foundation dividend stocks for your portfolio based on their portfolio of properties, their diversity within their portfolio, and their dividend history.  The company is making the moves necessary to continue growing their cash flow while taking advantage of the cheap capital that is available in the current market place.  It is a strong company that I would love to add to my portfolio one day..bottom line.  I will continue to monitor the stock price and see if the right opportunity to strike occurs.  The sleeper here is that another company I recently purchased, Cardinal Health, had a tough day on Friday.  So I may have to use my available capital to increase my stake in the medical company.  Trust me, I’ll keep all of you updated with my decision.  But I leave this analysis content that if I were to buy Realty Income, I would be buying a quality dividend growth stock at a price that is not a discount, but isn’t outrageous either.

What are your thoughts on Realty Income (O) and their recent earnings?  Do you think the company is over-valued?  If so, what is your entry point?  Are there other REITs you would consider instead of Realty Income (O)?  If not a REIT, what other stocks are you watching?  Would you prefer a company like VF Corp, the company that Lanny just performed a stock analysis over? Thanks everyone.  Looking forward to your comments!



6 thoughts on “Realty Income (O) Dividend Stock Analysis – REVISITED

  1. Love the company and business model, but the stock still seems over valued to me because they just can’t realistically grow that fast. Part of the stretched valuation is the low interest rate environment and the search for yield. Heck I almost sold some of my Realty Income shares about 2 months ago because the share price was up over $70, yield was down to around 3.5% at that point and the high end of my fair value on the shares is mid $50’s.

    I personally like VFC right now among the long time dividend growers and the fact that they’re trading at a decent valuation. DLR also looks tempting if you can get it around say $85. JNJ looks okay in the low $110’s. Sadly that’s the state of things right now where most of the companies I’d like to buy are trading on the high end of fair value or slightly over valued. Although I’m not exactly swimming in cash right now so it’s not like I’d be buying anyways.

    Have a great weekend.

    • JC,

      Agree with your overall assessment, this is a tough overvalued market. But there are some potential gems to be had.

      The one thing I considered with the interest rate environment was the length of their current debt. These aren’t short term deals. They locked in 3% for 10+ years. So they will be taking advantage of the low interest rate environment for a while. Plus, I’m guessing this is why they have investing as much as possible now so they can continue to capitalize on the rate environment. That being said, I can see how you think they are overvalued; especially if you have had a history purchasing the stock at a lower price in the past.

      I’m also digging VFC as well based on Lanny’s analysis earlier in the week. They are definitely on my watch list now with Realty Income. If JNJ were to continue to slide, I would be all over that company. I have been itching to add to my stake.

  2. A couple of years ago I was trying to decide if I wanted to pick up O or NNN. I ended up going with NNN and while it’s treated me really well, I sometimes wish that I had bought O instead. With my asset allocation as it is I probably won’t make any changes right now. But in the future if O pulls back further I will probably pick some up. Thanks for sharing 🙂

  3. The Fed will raise after the election… REITs are already down due to the fear, look at the chart from last Dec-Jan. I want to pick up some REITs but I would wait, that yield be 5% in 2017.

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