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Realty Income Stock Hits 52-Week High: Should You Take the Bait?
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Shares of Realty Income (O - Free Report) hit a 52-week high of $62.27 on Tuesday and finally closed at $62.15, up 21.5% in the past three months. The company also outperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 15.9% and the S&P 500 composite’s rise of 6.2% over the same time frame.
3-Month Price Performance
Image Source: Zacks Investment Research
The recent indications of a rate cut in the September FOMC meeting have played a catalyst for this “Monthly Dividend Company”. Further, the solid second-quarter earnings and adjusted funds from operations (AFFO) growth, along with the REIT’s encouraging investment plans, have raised investors’ optimism for this leader in the net lease sector.
However, investors may be wondering if they’ve missed the investment opportunity or if there’s still time to take a position. Let's explore further to determine whether it’s wise to consider taking or increasing positions in O or waiting for a better entry point.
What is Driving Realty Income Stock?
As the inflation reading has now become favorable, the focus has shifted toward confronting the cooling of the labor market. The recent narratives from the Fed Chair also suggest that a rate cut may eventually occur as early as September. This sounds good for rate-sensitive REITs, including Realty Income, because of REITs’ debt-dependence nature and for viewing them as bond substitutes due to their consistent and high dividend payouts.
Considering Realty Income’s growth opportunities through acquisitions, the timing of the Fed’s rate cut has gained much importance for its investors. An improving investment environment has made the company ambitious, and O aims to achieve $3 billion in investments in 2024. Its focus on the European markets also augurs well.
Another reason for Realty Income grabbing investors’ attention as we approach the actual rate cut is because it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.3% since 1994. Furthermore, with bond market yields declining, O’s forward dividend yield has become relatively more attractive to income investors.
The company’s core business is performing strongly and generating substantial AFFO, with 6% year-over-year growth achieved in AFFO per share in the second quarter. The solid performance of O in recent quarters and improving investment environment are also motivating the company to adopt a more ambitious investment strategy and deliver highly sustainable dividend payouts. Realty Income also has a solid balance sheet and ample liquidity that arms it well to root for investing more aggressively with improvement in market conditions.
Will the Trend Last for O?
Realty Income’s quest for external growth resulted in the company completing its all-stock merger transaction with Spirit Realty Capital, Inc. in January 2024, which added to its size, scale and diversification. Also, as part of its diversification efforts, in November 2023, Realty Income entered into a JV with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia.
While this foray into the data center market can be considered a meticulous one, this will require close vigilance. Also, any choppiness in the economy will affect the company’s performance and investments in the upcoming quarters.
Moreover, if there are hiccups in the inflation metrics and the path of rate cuts does not sync with what is now expected, then rate-sensitive stocks like REITs, including Realty Income, will bear the brunt. This will affect O’s dividend yield attractiveness.
The recent estimate revision trends do not provide a clear direction either. The full-year 2024 consensus mark for AFFO per share has been revised upward over the past week, while for 2025, the same has been adjusted below the prior projections.
Image Source: Zacks Investment Research
From a valuation perspective, we note that with the recent rally, O is trading at a forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, of 15.03X. It is at a discount to the industry average of 16.23X but ahead of its 1-year median of 12.77X and close to its high of 15.36X. This implies that the market has recognized or priced the company’s growth prospects or earnings potential.
The stock is also trading at a premium to its industry peer NNN REIT, Inc.’s (NNN - Free Report) current forward 12-month P/FFO of 13.69X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A detailed analysis indicates that since Realty Income is sensitive to interest rate changes, the latest expectations for rate cuts are generating enthusiasm among investors for this stock. However, any slowdown in the macroeconomic environment is likely to affect the company’s performance and investment plans. Also, if the rate cut trajectory deviates much from what is expected, then this stock, along with the REIT industry, is likely to bear the brunt.
Similar sentiments of analysts are also echoed in the estimate revision trends, and with the recent rally, the valuation is not as cheap as it was earlier.
As a result, existing shareholders may consider holding on to their shares in anticipation of Realty Income executing its growth strategy. However, prospective investors should consider waiting for a more favorable entry point before investing.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.
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Realty Income Stock Hits 52-Week High: Should You Take the Bait?
Shares of Realty Income (O - Free Report) hit a 52-week high of $62.27 on Tuesday and finally closed at $62.15, up 21.5% in the past three months. The company also outperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 15.9% and the S&P 500 composite’s rise of 6.2% over the same time frame.
3-Month Price Performance
Image Source: Zacks Investment Research
The recent indications of a rate cut in the September FOMC meeting have played a catalyst for this “Monthly Dividend Company”. Further, the solid second-quarter earnings and adjusted funds from operations (AFFO) growth, along with the REIT’s encouraging investment plans, have raised investors’ optimism for this leader in the net lease sector.
However, investors may be wondering if they’ve missed the investment opportunity or if there’s still time to take a position. Let's explore further to determine whether it’s wise to consider taking or increasing positions in O or waiting for a better entry point.
What is Driving Realty Income Stock?
As the inflation reading has now become favorable, the focus has shifted toward confronting the cooling of the labor market. The recent narratives from the Fed Chair also suggest that a rate cut may eventually occur as early as September. This sounds good for rate-sensitive REITs, including Realty Income, because of REITs’ debt-dependence nature and for viewing them as bond substitutes due to their consistent and high dividend payouts.
Considering Realty Income’s growth opportunities through acquisitions, the timing of the Fed’s rate cut has gained much importance for its investors. An improving investment environment has made the company ambitious, and O aims to achieve $3 billion in investments in 2024. Its focus on the European markets also augurs well.
Another reason for Realty Income grabbing investors’ attention as we approach the actual rate cut is because it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 23 times in the past five years. This retail REIT has witnessed compound annual dividend growth of 4.3% since 1994. Furthermore, with bond market yields declining, O’s forward dividend yield has become relatively more attractive to income investors.
The company’s core business is performing strongly and generating substantial AFFO, with 6% year-over-year growth achieved in AFFO per share in the second quarter. The solid performance of O in recent quarters and improving investment environment are also motivating the company to adopt a more ambitious investment strategy and deliver highly sustainable dividend payouts. Realty Income also has a solid balance sheet and ample liquidity that arms it well to root for investing more aggressively with improvement in market conditions.
Will the Trend Last for O?
Realty Income’s quest for external growth resulted in the company completing its all-stock merger transaction with Spirit Realty Capital, Inc. in January 2024, which added to its size, scale and diversification. Also, as part of its diversification efforts, in November 2023, Realty Income entered into a JV with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia.
While this foray into the data center market can be considered a meticulous one, this will require close vigilance. Also, any choppiness in the economy will affect the company’s performance and investments in the upcoming quarters.
Moreover, if there are hiccups in the inflation metrics and the path of rate cuts does not sync with what is now expected, then rate-sensitive stocks like REITs, including Realty Income, will bear the brunt. This will affect O’s dividend yield attractiveness.
The recent estimate revision trends do not provide a clear direction either. The full-year 2024 consensus mark for AFFO per share has been revised upward over the past week, while for 2025, the same has been adjusted below the prior projections.
Image Source: Zacks Investment Research
From a valuation perspective, we note that with the recent rally, O is trading at a forward 12-month price-to-FFO, which is a commonly used multiple for valuing retail REITs, of 15.03X. It is at a discount to the industry average of 16.23X but ahead of its 1-year median of 12.77X and close to its high of 15.36X. This implies that the market has recognized or priced the company’s growth prospects or earnings potential.
The stock is also trading at a premium to its industry peer NNN REIT, Inc.’s (NNN - Free Report) current forward 12-month P/FFO of 13.69X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A detailed analysis indicates that since Realty Income is sensitive to interest rate changes, the latest expectations for rate cuts are generating enthusiasm among investors for this stock. However, any slowdown in the macroeconomic environment is likely to affect the company’s performance and investment plans. Also, if the rate cut trajectory deviates much from what is expected, then this stock, along with the REIT industry, is likely to bear the brunt.
Similar sentiments of analysts are also echoed in the estimate revision trends, and with the recent rally, the valuation is not as cheap as it was earlier.
As a result, existing shareholders may consider holding on to their shares in anticipation of Realty Income executing its growth strategy. However, prospective investors should consider waiting for a more favorable entry point before investing.
O stock currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.