Company Description: Realty Income Corporation is an equity real estate investment trust that owns, develops and manages retail real estate, primarily single tenant buildings throughout most of the U.S. The trust is also among a handful of REITS that pay monthly dividends.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
O is trading at a premium to all four valuations above. When also considering the NPV MMA Differential, the stock is trading at a 37.2% premium to its calculated fair value of $52.44. O did not earn any Stars in this section.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
O earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. O earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1994 and has increased its dividend payments for 27 consecutive years.
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of the $414 is below the $800 target I look for in a stock that has increased dividends as long as O has. The stock's current yield of 3.93% exceeds the 2.74% estimated 20-year average MMA rate.
Peers: The company's peer group includes: The American Tower Corporation (AMT) with a 1.8% yield, National Retail Properties, Inc. (NNN) with a 4.5% yield and The Macerich Company (MAC) with a 3.9% yield.
Conclusion: O did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of two Stars. This quantitatively ranks O as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $56.96 before O's NPV MMA Differential increased to the $800 minimum that I look for in a stock with 27 years of consecutive dividend increases. At that price the stock would yield 5.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $800 NPV MMA Differential, the calculated rate is 3.3%. This dividend growth rate is higher than the 0.8% used in this analysis, thus providing no margin of safety. O has a risk rating of 1.75 which classifies it as a medium risk stock.
O follows a conservative strategy which has led to it being one of the best-positioned REITs with a capacity to make additional acquisitions. Its tenants sign long-term leases with regular rent bumps that allows O to provide a reliable, slow-growing, monthly dividend. The company is well-managed has delivered consistent growth over time.
The company's debt to total capital of 44% (flat with the last review) is still below my 45% maximum. Its free cash flow payout of 90% (up from 88%) is above my maximum of 60%. The stock is currently trading at a 37.2% premium to my calculated fair value of $52.44. for now, I will wait for better metrics befor adding to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in O (2.6% of my Dividend Growth Portfolio).
Related Articles:
