I finished a series on dividend kings, companies that have paid an increasing dividend for 50 or more years. The series of 18 articles has produced companies that range from small cap to large cap with varying dividend growth rates from 1% to 26%. I really expected all of these companies to be good investments but some of them disappointed me. I wound up doing focus articles on companies that very quickly could be seen as not good long term investments when compared using the Good Business Guidelines.
So I got the idea of another series, companies that only had one letter in their symbol (no logical reason for this but just for fun), but did not want to do full reviews of companies that did not show promise. This is the sixth part of the series. I calculated the total return for each of the next 6 companies and will do individual articles on the ones that pass the positive total return guideline for the last 44.5 months. I chose the 44.5 month test period (starting January 1, 2013 and ending in late August) because it includes the great year of 2013, and other years that had fair and bad performance.
Here's the next six companies. Netsuite Inc. (NYSE:N) will not be included since it is being bought by Oracle (NYSE:ORCL). As a minimum this study will find some good company investments like the dividend kings series did .
The Dow baseline for 44.5 months is 38.32%
Total Return %
Difference from base line
Realty Income Corp. (NYSE:O)
Pandora Media (NYSE:P)
Quintiles Transnational Holding Inc (NYSE:Q)
Ryder Systems Inc. (NYSE:R)
Sprint Inc. (NYSE:S)
Average total return for the first 17 companies is 28.27% underperforming as a group by 10.05%.
This leaves us with two companies of the third set that pass the screen so we will continue with an individual look at the latest fundamentals of Realty Income Corp. found below as part 6. Additional articles part 7 will look at Quintiles Transnational Holding Inc and part 8 will cover the last six companies that have single letter symbols and maybe find some more interesting investments.
This article is about Realty Income Corp. and why it's a total return and dividend growth company that is being reviewed by The Good Business Portfolio. 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. Fundamentals of Realty Income Corp. 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 Corp. passes 11 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article " The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review". These guidelines provide me with a balanced portfolio of income, defensive, momentum, total return, and growing companies that keeps me ahead of the Dow average.
Realty Income Corp. is a large-cap company with the second largest capitalization of $17.1 Billion in the sector. In the retail real estate sector Realty Income Corp. is one of the largest with Genl. Growth Properties (NYSE:GGP) being bigger at a capitalization of $26.9 Billion, with the other companies much smaller under $10 Billion each.. Therefore Realty Income Corp. has the muscle to weather the storm when it comes. FFO earnings flow is good and improving and covers the company's expansion plans and dividend payments.
Realty Income Corp. dividend is 3.7% is above average and has been increased 10 of the last ten years with the last increase in July 2016 that was 2%. This make Realty Income Corp. a good choice for the dividend growth investor.
Realty Income Corp. last quarterly FFO beat last years at $0.71/share on increasing revenue which leaves Realty Income Corp. good cash flow and have enough left over for its continued business expansion and dividend increases.
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 Corp. has a three-year CAGR of 6% meeting my requirement. Looking back five years $10,000 invested five years ago would now be worth over $25,200 today (from S&P IQ). This makes Realty Income Corp. a good investment for the growth investor.
Realty Income Corp. S&P Capital IQ rating is three star or hold with a target price of $75. Realty Income Corp. is then under priced by 10% at present compared to the target price and a good choice for the growth investor with its increasing FFO earnings. The PE is a bit high at 22 but is still in line with some of the other retail real estate companies in this sector. Since the FFO has increased from the first quarter I think a fair entry price would be $60 raised from my previous estimate of $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, the total return guideline was just added to my list of guidelines. Realty Income Corp. did much better than the Dow baseline in my 44.5 month test compared to the Dow average. I chose the 44.5 month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013, and other years that had fair and bad performance. Modeling the Dow average is not an objective of the portfolio but just happened by using the 11 guidelines as a filter for company selection. The good total return makes Realty Income Corp. a company for the total return growth investor. Realty Income Corp. pays an above average dividend of 3.7% so the company is an dividend growth investment. DOW's 44.5 month total return baseline is 38.32%. The total return during the test period for Realty Income Corp. is above the DOW average at 83.43% beating the DOW baseline by 45.11%.
Dow Baseline 38.32%
44.5 Month total return
Difference from DOW baseline
Yearly Dividend percentage
Realty Income Corp.
Last Quarter's Earnings
For the last quarter on July 27, 2016 Realty Income Corp. reported earnings that just missed expected FFO earnings at $0.71 compared to last year at $0.69 and expected at $0.72. Total revenue was higher at $271 Million up from last year by 6.8% and missed expected revenue by $3.61 Million. This was a good report showing almost equal earnings on increased revenue year over year. Earnings for the next quarter will be out in late October and is expected to be $0.73. Realty Income Corp. guided there total FFO earnings for 2016 to $2.85-$2.90 enough to cover business expansion and it's high dividend..
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 4,540 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. Shown below are the top 20 tenant from the company web site.
Source Realty Income Corp. web site.
Realty Income Corp. is continuing its growth and invested $310 Million in 57 new businesses in the second quarter. For the first half of the year Realty Income Corp. invested $663 Million in new investments and increased its investment guidance from $900 Million to $1.25 Billion. It is this continuing growth that make Realty Income Corp. an interesting business as long as its bought at a reasonable price.
Takeaways and Recent Portfolio Changes
Realty Income Corp. is a good investment for the total return and dividend growth investor if bought at the right price of around $60. Realty Income Corp. will not be considered for The Good Business Portfolio now. The portfolio has a full position in Omega Health Investors (NYSE:OHI) which has much more value and is underpriced as a value play with a low PE of 14.2 to FFO. Please read my latest article on OHI if you are interested, "Omega Healthcare Investors REIT: What Will The 17th Quarterly Dividend Increase Be ? ".
Increased Omega Health Investors from 4.4% of the portfolio to 4.6% of the portfolio, I needed a little more income and OHI will give that to the portfolio.
Sold some Cabela's (NYSE:CAB) covered calls, sold October $52.5's. If the premium gets to 20% of the sold premium price, I will buy them back with the hope that CAB goes up so I can sell the calls again in the same month for a Double.
Sold some covered calls on Harley Davidson (NYSE:HOG), sold August 50'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 HOG price is presently above the strike price and I have moved the calls up and out. On August 10 the portfolio moved the HOG calls up and out to November 52.5's.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.3% of the portfolio, Altria Group Inc. (NYSE:MO) is 7.9% of the portfolio, Home Depot (NYSE:HD) is 8.0% of portfolio and Boeing (NYSE:BA) is 7.8% of the portfolio, therefore JNJ and HD are now in trim position with Boeing and Altria 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 2015 fourth quarter earnings call. For BA from the second 2016 earnings call deferred costs increased $33 Million a small amount and I project positive cash from the 787 program in the third quarter of possibly $100 Million. The KC-46A refueling plane has been authorized by the Pentagon for its initial production, this will be a big step to increase Boeing's already high cash flow even more. The contract has still to be awarded, which should be soon. Looking forward I expect Boeing to beat the expected third quarter earnings of $2.52 but will not trim it until it reaches 10.0% of the portfolio. About 1.6 years ago Boeing got above 10% of the portfolio and I trimmed it a little to get it below 10% of the portfolio.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post Brexit world.
For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review 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, AA, 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, MO, EOS, CAB, HOG.
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.