Tuesday, June 23, 2015

Realty Income Corp (O) Dividend Stock Analysis

Linked here is a detailed quantitative analysis of Realty Income Corp. (O). Below are some highlights from the above linked analysis:

Company Description: Realty Income Corporation is an equity real estate investment trust that owns commercial retail real estate properties in the United States.

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 17.1% premium to its calculated fair value of $39.36. 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 one Star in this section for 3.) above. 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 21 consecutive years.

Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:

1. NPV MMA Diff.
2. Years to > MMA

The NPV MMA Diff. of the $1,173 is below the $1,400 target I look for in a stock that has increased dividends as long as O has. The stock's current yield of 4.93% exceeds the 2.47% estimated 20-year average MMA rate.

Peers: The company's peer group includes: The DDR Corp. (DDR) with a 4.3% yield, National Retail Properties, Inc. (NNN) with a 4.6% yield and The Macerich Company (MAC) with a 3.2% yield.

Conclusion: O did not earn any Stars in the Fair Value section, earned one Star in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section for a total of one Star. This quantitatively ranks O as a 1-Star Very Weak stock.

Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $42.59 before O's NPV MMA Differential increased to the $1,400 minimum that I look for in a stock with 21 years of consecutive dividend increases. At that price the stock would yield 5.3%.

Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $1,500 NPV MMA Differential, the calculated rate is 3.0%. This dividend growth rate is higher than the 2.2% 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. The company is well-manged has delivered consistent growth over time. Its current strategy is to acquire well-located, freestanding single-tenant commercial properties with 10 to 20-year net lease agreements.

The company's debt to total capital of 49% (up from 46% in my last review) is slightly above my 45% maximum. Its free cash flow payout of -254% (previously 79%) is not sustainable over the long-term. The stock is currently trading at a 15.2% premium to my calculated fair value. As such, I will not significantly add to my position at this time.

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 (2.4% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.

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Tags: O, DDR, NNN, MAC,


  1. Interesting analysis, D4L. O is generally considered one of the best REITs. I have noticed that REITs are becoming popular again amongst the DGI crowd as stock prices come down and yield goes up. There is probably a ways to go (down) before REITs become real bargains. O would appear to be a buy between $37.50 and $40.80 based on historical valuations alone (similar to your Avg. High Yield Price and Avg. P/E Price).

    A couple of questions. Why are you using FCF payout ratio instead of AFFO payout ratio? AFFO is widely considered the best metric for valuing a REIT.

    Second, you show the 5 Year Dividend Growth + Yield as 5.2%. This appears to be what is known as the "Chowder Number" on Seeking Alpha. The current dividend of $0.19 per month, or $2.28 per year, is just over 5%. I calculate the 5 year dividend CAGR as 5.7% simply using the $0.143625 from June, 2010 to $0.19 in June, 2015. FASTGraphs shows the 5 year dividend CAGR as 5.1%. Either way, the total of 5 Year Dividend Growth + Yield is over 10%, not 5.2%. It is possible that I am misinterpreting your data and I would appreciate clarification.

    My questions aside, this is an incredible analysis. Thank you for sharing it.

  2. KeithX: AFFO is the REITs version of Adjusted EBITDA. Where you go the P&L in an effort to estimate cash. Why would you do this when there is a cash flow statement that perfectly reconciles cash of the periods presented. One reason to use the estimates instead of true cash flow is because they aren't truly cash and can be manipulated.

    As buffet once said, "We’ll (Berkshire Hathaway) never buy a company when the managers talk about EBITDA. There are more frauds talking about EBITDA. That term has never appeared in the annual reports of companies like Wal-Mart, General Electric, or Microsoft. The fraudsters are trying to con you or they’re trying to con themselves. Interest and taxes are real expenses. Depreciation is the worst kind of expense: You buy an asset first and then pay a deduction, and you don’t get the tax benefit until you start making money. We have found that many of the crooks look like crooks. They are usually people that tell you things that are too good to be true. They have a smell about them."

    I feel the same about FFO.

    As for the 5 Year Dividend Growth + Yield as 5.2%, where did you find this reference in the article? I've looked through the article and was not able to locate the 5.2%.

    Best Wishes,

  3. D4L,
    '5 Year Dividend Growth + Yield: 5.2%' is in the pdf under 'Dividend Analytical Data'. Sorry, I should have specified that my questions were regarding the pdf data. With that much information, it's lucky I only had 2 questions! :)

    Thanks for the response regarding FCF versus AFFO.

    1. The 5.2% was a glitch in the PDF. It was only the 5-year growth. Thanks for pointing it out.

      Best Wishes,


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