Realty Income Corp. - Increasing Monthly Income And Fantastic Total Return, But Overpriced

| About: Realty Income (O)

Summary

Realty Income Corporation dividend is 3.7% and has been increased for each of the last ten years year over year and with 550 monthly dividend payments and 86 increases looking.

Realty Income Corporation can continue its steady upward growth trend benefiting from its increasing number of properties in the company.

Realty Income Corporation total return over performed the Dow for the 41.5 month test period by 44.96%.

This article is about Realty Income Corporation (NYSE:O) and why it's an income and total return company that is being reviewed by The Good Business Portfolio. The Good Business Portfolio has a full 4% position in Omega Health Investors (NYSE:OHI) and comments from OHI articles have almost always mentioned Realty Income Corporation, so I thought it was a good time to check out the company. Realty Income Corporation is a real estate investment trust (REIT). The Company is engaged in in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology and capital markets capabilities. Its portfolio includes approximately 4,615 properties. Fundamentals of Realty Income Corporation will be looked at in the following topics, The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.

Good Business Portfolio Guidelines.

Realty Income Corporation passes 10 of 10 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. There are many good business companies that don't break many of these guidelines but will still not be considered for the portfolio at this time. For a complete set of the guidelines, please see my article "The Good Business Portfolio: All 24 Positions." These guidelines provide me with a balanced portfolio of income, defensive and growing companies that keeps me ahead of the Dow average.

Realty Income Corporation is a large-cap company with a capitalization of $16.6 billion. Its portfolio includes approximately 4,615 properties, of which over 4,519 are single-tenant properties, and the remaining are multi-tenant properties. Realty Income Corporation has cash and credit facilities of $650 Million to be used when the opportunity occurs.

Realty Income Corporation has a dividend yield of 3.7% and its dividend has been increased for ten of the last ten years. The payout ratio of FFO is high at 83% because of its REIT designation. Realty Income Corporation therefore is a income story with the company to continue to add new properties for growth. At the last stock holders meeting management raised its guidance on new property buys from $750 Million to $900 Million for 2016.

Realty Income Corporation quarterly income is good at $0.70/share FFO which leaves Realty Income Corporation good cash flow, allowing it to pay its high dividend and have some left over for its continued growth investments.

I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income and I need 1.9% more for a yearly distribution of 5%. Realty Income Corporation has a past three-year CAGR of 30% more than meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $25,300 today (from S&P IQ). This makes Realty Income Corporation a good investment for the income and total return investor with its steady 6% increasing dividend and good earnings growth.

Realty Income Corporation S&P Capital IQ rating is a hold with a target price of $52 using the 5 year Price/FFO ratio of 17.5 for the sector. Realty Income Corporation is overpriced at present but a good choice for the income and total return investor when bought at the right entry point of about $57.

Total Return And Yearly Dividend

The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Realty Income Corporation did better than the Dow baseline in my 41.5 month test compared to the Dow average. I chose the 41.5 month test period (starting January 1, 2013) because it includes the great year of 2013, the moderate year of 2014, the losing year of 2015 and the slightly higher year of 2016 YTD. Modeling the Dow average is not an objective of the portfolio but just happened by using the 10 guidelines as a filter for company selection. The great total return makes Realty Income Corporation appropriate for the growth investor with the 6% dividend growth good for the income investor. The dividend is above average for the market but low for a REIT and is easily covered by the FFO. The monthly dividend has been paid for 550 months and has been increased 86 times during this period. The dividend has been increased in each year of the last 10 years and the last increase was a 7% increase in February Year over Year. DOW's 41.5 month total return baseline is 36.34%. The total return during the test period is fantastic at 81.30% beating the pants off the DOW baseline. One thing I did not understand was for the 2013 calendar year Realty Income Corporation had a negative total return compared to the DOW rise of 27%, but Realty Income Corporation has more than made up for that lately.

Dow Baseline 36.34%

Company Name

41.5 Month total return

Difference from DOW baseline

Yearly Dividend percentage

Realty Income Corporation

81.30%

44.96%

3.7%

Click to enlarge

Last Quarter's Earnings

For the last quarter on April 26, 2016 Realty Income Corporation reported earnings that beat expected earnings at $0.70 FFO compared to last year. Revenue was much higher at $267.1 Million or +8.2% year over year increase and inline with expected. This was a good report. Realty Income Corporation increased their guidance to $2.85 -2.90 FFO for the year. The steady growth in Realty Income Corporation should provide a company that will continue to have above average total return and provide steady income for the income investor if bought at a better entry point.

Business Overview

Realty Income Corporation is a real estate investment trust (REIT). The Company is engaged in in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology and capital markets capabilities. Its portfolio includes approximately 4,615 properties, of which over 4,519 are single-tenant properties, and the remaining are multi-tenant properties. The Company has over 280 lease expirations and re-leased approximately 250 properties. It sold over 30 vacant properties. The Company has grouped its tenants into 48 activity segments, including Apparel, Automotive tire services, Beverages, Child care, Convenience stores, Dollar stores, Drug stores, Financial services, Food processing, Grocery stores, Health and fitness, Health care, Home improvement, Restaurants-casual dining, Restaurants-quick service, Sporting goods, Theaters, Transportation services, Wholesale club and 30 other non-reportable segments. At the last earnings call John Case CEO of Realty Income Corporation said " We anticipate another solid year of earnings and dividend growth". Realty Income Corporation has a negative factor that rising interest rates will hurt the company's earnings. The economy is showing weakness right now and I think the FED will be on hold for at least 3 months if not longer and raise rates slowly if at all in 2016.

Takeaways and Recent Portfolio Changes

Realty Income Corporation is an investment for the total return and income dividend growth investor but is a bit pricey right now and it might be good to wait for a better entry point. Considering Realty Income Corporation steady dividend growth of 6%, its current dividend yield of 3.7% and its fantastic total return better than the Dow average, Realty Income Corporation will be considered for The Good Business Portfolio when a open slot is available. The good Business Portfolio has OHI in it at present in the REIT sector, that also has good fundamentals and is under priced and a bargain right now. One negative for Realty Income Corporation is when the Fed starts raising interest rates that will cause rising interest expense, giving Realty Income Corporation a headwind

Bought more OHI to make it a full position of 4.0% of the Good Business Portfolio. So now we just watch it grow until it reaches 8% of the portfolio. .

Trimmed Johnson & Johnson from 8.9% of the portfolio to 8.4% of the portfolio, must have good portfolio management and not let any one company get much above 8% of the portfolio. I love JNJ, it pays a 2.8% dividend grows at 8-10% a year and is defensive, JNJ should be in all portfolios.

Sold some covered calls on Harley Davidson (NYSE:HOG), sold July 45's. If the premium gets to 20% of the sold premium price I will buy them back with the hope that HOG goes up so I can sell the calls again in the same month for a Double.

The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. Below are the six top positions in The Good Business Portfolio. Johnson and Johnson (NYSE:JNJ) is 8.2% of the portfolio, Home Depot (NYSE:HD) is 7.8% of portfolio, Boeing (NYSE:BA) is 8.0% of the Portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Eaton Vance Enhanced Equity Fund II (NYSE:EOS) is 7.0% of the Portfolio and Walt Disney (NYSE:DIS) is 6.9% of the portfolio, therefore BA and JNJ are now in trim position with Altria Group Inc., Home Depot, Eaton Vance equity Fund II and Walt Disney getting close. Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs, announced in the fourth quarter earnings call. In the first quarter of 2016 deferred costs were $141 Million and deceasing as the year goes on. Deferred costs should start to decrease in the coming quarters and positive cash flow from the 787 program start to happen.

For the total Good Business Portfolio please see my recent article on Good Business Portfolio: 2016 first-quarter earnings and performance for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over.

I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.

Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.

Disclosure: I am/we are long BA, JNJ, HD, DIS, EOS, OHI, MO, CAB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.