Case Study: Realty Income (O) stock according to high performing analysts
Key Points
Performance
Realty Income shares rose by 0.29% this week, pushing their year-to-date gains up to -1.33%. This compares poorly to the S&P 500 which is up by 8.16% on the year thus far.
Event & Impact
Realty Income posted its first quarter results this week, beating consensus estimates on both the top and bottom lines. During Q1, Realty Income’s revenue totaled $944.39 million, beating Wall Street’s consensus estimate by $61.3 million. Realty Income’s Q1 funds from operations came in at $1.04 which was $0.03/share above consensus estimates.
Noteworthy News:
Realty Income’s significant investments during 2022 showed up during their Q1 results; last year, this company acquired approximately $9 billion of commercial properties, and with a 99% occupancy ratio at the end of the first quarter, the company’s rent growth increased significantly. This allowed Realty Income to raise its dividend again during the quarter, extending its decades-long streak.
Nobias Insights
81% of recent articles published by credible authors focused on O shares offer a “bullish” bias. However, two out of three credible Wall Street analysts who cover Realty Income believe that shares are likely to fall in value. The average price target applied to Realty Income by credible analysts is $69.67, which implies upside potential of 10.7% relative to the stock’s current price of $62.95.
Bullish Take Brett Ashcroft Green, a Nobias 4-star rated author, said, “In March, it increased the dividend for the 120th time since public listing in 1994, to an annual rate of $3.06 per share, representing 3.2% growth from the prior year period.”
Bearish Take Value Quest, a Nobias 4-star rated author, said, “After comparing the forward P/FFO ratio of 14.75x with the sector median of 12.53x, I think the company is overvalued at current price levels as per the P/FFO valuation method.”
O May 2023
Realty Income (O), one of the world’s largest Real Estate Investment Trusts with a $42.5 billion market capitalization, posted earnings this week. Realty Income is often viewed as a proxy for the commercial real estate sector due to its 12,000+ property portfolio. Not only is Realty Income known for its large size, but also, its reliable monthly dividend.
This company has trademarked the phrase, “The Monthly Dividend Company” and has been paying out monthly dividends to shareholders for more than 50 years. What’s more, Realty Income has increased its annual dividend every year since becoming public in 1994, making it a Dividend Aristocrat (companies with 25+ years of consecutive annual dividend raises). Realty Income’s growing monthly dividend, alongside its relatively high 4.86% dividend yield, has made this stock a popular investment amongst retirees for decades.
Bullish Nobias Credible Analysts’ Opinions:
With the company’s first quarter results in place, the vast majority of credible authors that track the stock remain bullish. Brett Ashcroft Green, a Nobias 4-star rated author, covered Realty Income’s first quarter results in an article at Seeking Alpha this week, where he referred to the stock as “My Dollar Store Darling”. He noted that Realty Income is a Real Estate Investment Trust (REIT) and said that at the end of 2022, the company’s most recent 10K form stated that it, “owned or held interests in 12,237 properties”. That 10K form also stated, “Clients doing business in 84 separate industries; • Locations in all 50 United States ("U.S."), Puerto Rico, the United Kingdom ("U.K."), Spain, and Italy”.
And looking at this portfolio, Green wrote, “The tenants are my favorite part about Realty Income.” It has a beautiful stable of Dollar, grocery, and convenience stores. This is right where I want to be if we hit a recession.”
Examining Realty Income’s Q1 results, Green said, “Recent earnings trends from the May 4th call saw Realty Income miss on the top line by $883 million. It met expectations on the bottom line EPS at $.34 a share and delivered AFFO per share of $0.98.” “For the first quarter, occupancy was 99%, matching last quarter for the highest rate at the end of a reporting period in over 20 years,” he continued.
“In March,” Green added, “it increased the dividend for the 120th time since public listing in 1994, to an annual rate of $3.06 per share, representing 3.2% growth from the prior year period.” And he said, “With the projected forward yield at a tad over 5%, we're getting Realty Income at just about the top of its trailing 10-year average.”
Green notes that Realty Income is an income oriented investment, stating, “Hunting for stocks that both grow their yield and exceed the risk-free rate is not an easy task. High-yield FDIC-insured savings accounts and money market funds are throwing off somewhere in the neighborhood of 4.5+%. Not only is Realty Income Corporation at least matching that, their growth rate and frequency of compounding, which match the monthly compounding of an HYSA, are a great alternative that should be beating the risk-free rate in the not-too-distant future.”
With that in mind, he continued, “With a dividend yield now at the top of its 10-year average and a price that is only about 1.5 X the asset value, depending on how you want to slice it, the Realty Income Corporation price seems attractive.”
Overall, Green concluded, “This dividend aristocrat is down nearly 10% YTD and I have started adding monthly”. “Buy Realty Income Corporation stock with a target of $62 on the low end and $67 on the high end.”
Bearish Nobias Credible Analysts Opinions:
Value Quest, a Nobias 4-star rated author, recently covered Realty Income in an article that they published at Seeking Alpha as well. Like Green, Value Quest highlighted Realty Income’s size, scale, and the overall strength of its operations (historically speaking). They wrote, “Realty Income Corporation (NYSE:O) is a real estate investment trust ("REIT") that acquires and maintains standalone commercial buildings. The company has a long and consistent dividend growth record since 1994, when it went public (and since 1969 when it originated), and I believe it can sustain this growth in the coming years.”
Value Quest continued, “The company has an impressive and long track record of consistent dividend growth. As we can see in the above chart, the dividend payment of the company has increased steadily in the past. It has managed to maintain its dividend growth for 28 consecutive years and 101 quarters as a member of the S&P Dividends Aristocrats Index.” The author said, “It has a highly diversified portfolio in terms of regions, clients, and property type, ensuring the resiliency of its 92% rent from economic downturns.” “In addition,” they noted, “the company is highly dedicated to its expansion plans, which has significantly increased its acquisition volume to $9 billion in FY2022..”
These investments are a growth catalyst and Value Quest made it clear that this is showing up on the company’s top-line, stating, “The company has reported 59.8% YoY rental income growth driven by rising inflation and the acquisition of 1300 properties in 2022.” However, this growth doesn’t come without a cost. The author points out that “The company currently has $17.4 billion in long-term debt on its balance sheet, which is 42.3% of the current market capitalization.”
Overall, Value Quest acknowledged that Realty Income is a high quality company; however, they concluded that shares are too expensive in today’s market environment. “According to Seeking Alpha,” Value Quest wrote, “the company's FFO per share for FY2023 might be $4.00-$4.21, which is a growth of -0.1%-4.21%.” “After considering all the growth factors, I think that the growth of 4.21% is accurate. That is why I am estimating FFO per share of $4.21 for FY2023, which gives the forward P/FFO per share ratio of 14.75x,” they added.
And therefore, Value Quest said, “After comparing the forward P/FFO ratio of 14.75x with the sector median of 12.53x, I think the company is overvalued at current price levels as per the P/FFO valuation method.” They concluded, “Rising inflation and interest rates could adversely affect Realty Income Corporation profit margins.”
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
Lastly, the author wrote, “I think the relatively high dividend yield cannot justify the overvalued share price for new investors.” Therefore, after considering all these factors, I assign a sell rating to Realty Income Corporation.”
Overall bias of Nobias Credible Analysts and Bloggers:
However, recent credible analyst reports disagree with this bearish sentiment. According to The Fly on the Wall, “Realty Income (NYSE:O) price target raised to $80 from $79 by RBC Capital analyst Brad Heffern. This maintains O as Outperform.” Heffern is a Nobias 4-star rated analyst.
Overall, 81% of recent articles published on Realty Income by credible authors have expressed a “bullish” sentiment. The credible Wall Street analysts who cover Realty Income aren’t quite so bullish, with two out of the three analysts that Nobias recently offering price targets that imply that Realty Income is overvalued.
However, because of Heffern’s bullish fair value estimate, the average price target being applied to Realty Income shares is $69.67, which represents upside potential of approximately 10.7%.
Disclosure: Nicholas Ward is long O. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.