Realty Income: Dividend Analysis

Realty Income Corporation engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company leases its retail properties primarily to regional and national retail chain store operators. As of December 31, 2007, it owned 2270 retail properties located in 49 states, covering approximately 18.5 million square feet of leasable space.

The company is a dividend achiever as well as a component of the S&P 1500 index. It has been increasing its dividends for the past 14 consecutive years. From 1998 up until June 30 2008 this dividend growth stock has delivered an annual average total return of 14.90 % to its shareholders.

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 At the same time, the company has managed to deliver a 5.50% average annual increase in its FFO since 1998. FFO is a common measurement for a REIT. It is an alternative non-GAAP measure that is considered to be a good indicator of a company’s ability to pay dividends.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The ROE has been decreasing from its 2001 highs around 13% to about 9% in 2007.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual dividend payments have increased over the past 10 years by an average of 5.1% annually, which is slightly lower than the growth in FFO. A 5% growth in dividends translates into the dividend payment doubling almost every 14 years. If we look at historical data, going as far back as 1994, O will have managed to double its 1994 monthly dividend payment of $0.0775/share by 2009.

 

 

 

 

 

 

 

 

 

Realty Income is one of the few companies which make monthly dividend payments to shareholders. The company is so proud of its ability to raise dividends several times per year, that it calls itself the Monthly Dividend Company.

If we invested $100,000 in O on December 31, 1997 we would have bought 9465 shares (adjusted for a 2:1 split in 2005). In January 1998 your monthly dividend check would have been for $757. If you kept reinvesting the dividends though instead of spending them, your monthly dividend income would have risen to $2774 by June 2008. For a period of 10 years, your monthly dividend payment would have increased by 72 %. If you reinvested it though and took advantage of the monthly compounding effect, your quarterly dividend income would have increased by 266%.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The payout from funds from operations has remained at the 80%-87% range for the majority of our study period. One of the reasons why I wasn’t enthusiastic about the stock in february was because of this high payout. Do not repeat the same mistake as me however – In order to maintain their tax status as a REIT for federal income tax purposes, they generally are required to distribute dividends to our stockholders aggregating annually at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and by excluding net capital gains), and are subject to income tax to the extent we distribute less than 100% of the REIT taxable income (including net capital gains). In addition to that, the fact that the company has managed to keep increasing its profits and dividends while keeping the payout form operations stable is a positive sign.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One potential risk for the company is if it is unable to meet its financing needs from debt markets. I believe that we have seen most of the bad news in the financial markets. Since O managed to do just fine during the financial crisis that started last summer, I believe that it should do well in the future as well.

Another potential risk could be that the softening economy could have an adverse effect on some retailers and restaurants, which occupy O’s buildings. The vacancy ratio is about 96.8% as of July 28 2008, versus 98.6% as of June 30, 2007.

Overall, I think that Realty Income (O) is another dividend stock that should be in every long term dividend investor’s portfolio. It is nice to have another asset class in your portfolio in order to achieve diversification.

Disclosure: I own shares of O

Comments

[David Van K...:]

Dobromir,

Good analysis. Realty Income is one of my favorite dividend-paying stocks. I own it in both my "published" and personal portfolios. I love the "Monthly Dividend Company" slogan--it is a good insight into the dividend intentions of the company.

And you are right, a high payout ratio in a REIT must be considered in light of the legal requirements to be formed as a REIT. By choosing this form of corporate organization, a company avoids taxes at the company level. The downside to an investor is that REIT dividends are taxed to the shareholder at his or her individual tax rate, not at the special 15% tax rate for most dividends.

Dave

2008 Aug 04 10:10 AM

[sf123:]

vacancy ratio is something that worries me right now. I think it will probably get worse in the near future. However, the stock may look attractive if the prices go lower.

2008 Aug 04 11:45 AM

[doylegroup:]

"vacancy ratio is something that worries me right now" - thats why I've had this stock on my watch list for a while now. Waiting for lower entry point. Love the idea of monthly div's in my IRA.

2008 Aug 05 11:23 AM

[Old Trader:]

I've owned this stock for several years in an IRA, and its a steady, reliable performer. The company seems to do a good job of screening acquistions, and is careful not to overpay for them. I've added to the position on "dips" (far and few between). Around $25, I'd consider it a "buy", and should it dip back towards $23, back up the truck.

old trader

2008 Aug 05 07:42 PM

[granger:]

good stuff as always, thank you

2008 Aug 06 04:21 AM