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Realty Income Corp, Where's The Bottom

|Includes: Realty Income Corporation (O)
Summary

Reality Income is a favorite among retail investors.

The company has seen about a 24% drop from its high.

Reality Income current share price looks attractive at these levels.

For the bargin hunter, historical data provides clues to where the share price bottom might be.

Many authors on SA have written about O. My go-to SA author on REIT's is Brad Thomas. On the faint possibility the reader is not familiar with this company, I would encourage a review Mr. Thomas's SA articles on O. 

The Fast GRAPHS chart above shows that the current share price of O, as of 1/26/2018, looks attractively priced. That is, it is trading just below its average Price to Adjusted Funds From Operations ratio (P/AFFO) (18.6) at 17.8. All things considered, This appears to be a nice entry point for O. But looking at the companies nine year history reveals its share price has traded significantly below its average P/AFFO (blue line) as shown below.

A look at each of these six data points would reveal the following P/AFFO's and share price's and for each of the six dates. 

Date.      P/AFFO     S. Price.     

7/29/11      16.7           $34.68      

9/30/11      16.3           $39.27      

12/31/13    15.5           $37.64      

9/13/14      16.1           $39.92      

6/30/15      16.7           $47.61     

8/31/15      16.7           $44.69

Mean          16.3     

1/26/18      17.8           $54.21      

If one were to just compute some simple mathematics, a mean or average P/AFFO of 16.3 would be found compared to the closing P/AFFO of 17.8 on 1/26/18.

A 16.34 P/AFFO at the current trailing 12 month AFFO of $3.04 would suggest an average bottom price of $49.67 for O.

BUT WAIT, THERE'S MORE

While granted, this is a very simplistic way of comparing these six data points, it is important to understand that all REIT's, including O, tend to move in harmony with the 10 Year Treasury Note. The chart below compares the six dates with their corresponding 10 Year Treasury Yields for each date and, the difference or spreads between the 10 Year yield when compared to O's dividend yield.

Date        O Div Yield     10 Yr Yield     Difference (Spread)

7/29/11        5.02%           2.27%               2.75%

9/30/14        4.43%           1.92%               2.50%

12/31/13      5.77%           3.06%.              2.71%

9/13/14        5.49%           2.56%.              2.93%

6/30/15        4.79%           2.34%               2.45 %

8/31/15        5.10%           2.20%               2.90%

Mean                                                         2.70%

1/26/18        4.83%           2.62%.               2.21%

Calculating the mean difference of the spread between O's dividend yield and the 10 year Treasury note reveals an average spread of 2.70%. This average or mean percent spread would indicates that O would need to produce a yield of about 5.5% to reach that same percentage spread at the 1/26/28 price.  

Hence an average bottom share price of $47.80 would produce an approximate yield of 5.5% given O's current dividend rate.

Conclusion

These quick calculations would indicated that the average bottom price range for O would be between $47.80 and $49.97, depending on which set of historic metrics one would wish to use. Of course there is absolutely no guarantee that O can't put in a new all time low P/AFFO or higher spread between its dividend yield and the 10 Year Treasury bench mark. 

For those of us who just love to get a bargain (and greater margin of safety), it is sometimes fun just to "run the numbers". But...........

Having said all that, there are MAJOR risks involved in trying to bottom fish for any stock. My thirty five years of investing in the stock market has taught me that trying to purchase an equity at its absolute bottom is foolish. More often than not it has resulted in missing opportunities to purchase fine companies at a great price! CAT, XOM and CMI come to mind. So, If I didn't already own O, I would consider opening a partial position at these levels and average down if the opportunity presented its self. If I already owned a healthy portion of O in my portfolio, I might wait a bit to see if O drifts downs to the bottom average ranges. 

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in O over the next 72 hours.

Additional disclosure: A list of my current equity positions can be found on my Seeking Alpha profile page.