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Realty Income, also known as the monthly dividend company, has proven to be a safe haven amidst market downturns. While other stocks have declined sharply, Realty Income's share price has actually seen a slight increase. This raises an important question for investors - does Realty Income still offer an attractive valuation, or is it time to look elsewhere for investment opportunities? In this article, we will discuss the relative attractiveness of Realty Income's shares, including their business strategy, risks, and current valuation compared to other big-dividend REITs.
Overview
Founded in 1969 and publicly traded since 1994, Realty Income Corp (NYSE:O) focuses on acquiring and managing commercial real estate properties. Its impressive track record of dividend increases has landed it a spot in the elite S&P 500 Dividend Aristocrat Index, which comprises companies that have consistently increased their dividends for 25 consecutive years. With over 6,700 properties generating rental revenue from long-term lease agreements with commercial tenants such as Walgreens, CVS, and Dollar Tree, Realty Income boasts a diversified portfolio across tenants, industries, and geographies. Nearly 96% of its rental revenue comes from tenants with a nondiscretionary service and/or a low price point component, making them resilient to economic downturns and isolated from e-commerce pressures.
Business Strategy
As one of the most stable and financially strong REITs in its space, Realty Income sees acquisitions as a key driver of growth. With its strong financial position and attractive market conditions, the company is well-positioned to capitalize on potential distressed assets and consolidate a highly fragmented net lease industry. For example, Realty Income's recent merger with VEREIT has created a premier net lease REIT with increased size and scale, supporting long-term growth.
Risks
Like any business, Realty Income faces its own set of risks. Being a large company can present challenges in terms of scaling growth. Additionally, interest rate risk is always a concern. Although Realty Income has long-term tenant leases with built-in rent escalators, small escalator increases and high inflation could put pressure on margins. However, as the company takes on new acquisitions, rates may align with the market, and the old rates will eventually be replaced.
Valuation
From a valuation standpoint, Realty Income may appear relatively expensive compared to some of its peers, but this can be attributed to its stronger and healthier business. The company's outperformance and its "blue chip" nature have contributed to a higher price-to-Adjusted-FFO multiple. However, it's crucial to note that Realty Income still has positive expected growth in Adjusted Funds From Operations this year and next. As the company continues to grow its acquisition pipeline, the expected growth for 2023 is likely to rise further.
Comparing Realty Income to Dividend Aristocrats
An interesting perspective is gained by comparing Realty Income to its dividend aristocrat peers - S&P 500 companies that have consistently increased their dividends for at least 25 years. Realty Income not only boasts the 6th highest dividend yield among this group but has also delivered a positive total return this year, which sets it apart from most companies in the list. This stability in times of volatility is a testament to Realty Income's strength.
The Bottom Line
In conclusion, Realty Income presents a compelling investment opportunity for income-growth and price appreciation investors. With its solid financial position, prudent business strategy, impressive dividend growth, and attractive valuation, the company stands out among its peers. Furthermore, Realty Income's real estate business remains promising due to its prime location properties, which are largely unaffected by the rise of online shopping. Despite potential risks, such as rising interest rates and conservative rent escalators, we believe Realty Income offers a steady income-growth and price appreciation potential. As an SEO specialist, I recommend considering Realty Income as a valuable addition to your investment portfolio.
Disclaimer: The author of this article is long shares of Realty Income and does not intend to sell.
