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Realty Income Stock Up More Than 18% in 3 Months: Time to Buy or Hold?
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After reaching a 52-week high early in September, shares of Realty Income (O - Free Report) are trading 1.4% lower, closing at $62.48 yesterday on the NYSE. Still, it marks an 18.3% increase in the past three months, outperforming the Zacks REIT and Equity Trust - Retail industry’s growth of 16.6% and the S&P 500 composite’s rise of 4.3% over the same time frame.
The recent rate cut and indications of a probable reduction in rates in the upcoming period have significantly contributed to this surge in the stock price of this leader in the net lease sector. Earlier this month, this REIT also came up with a dividend hike announcement, which marked its 127th dividend hike since its listing on the NYSE in 1994. Apart from these, the REIT’s investment plans, with a special emphasis on Europe, have raised investors' optimism about the stock in recent times.
However, investors might be questioning whether they’ve missed their chance to invest or if there’s still time grab it. Let’s delve deeper to assess whether it makes sense to take or increase positions in O or if it’s better to wait for a more favorable entry point.
3-Month Price Performance
Image Source: Zacks Investment Research
What is Driving Realty Income Stock?
Amid indications of a moderation in inflation and a softening of the labor market, the Federal Reserve recently announced a 50-basis point cut to the federal funds rate. It marked the first downward move in four and a half years and will avert a labor market slowdown.
This bodes well for rate-sensitive REITs, such as Realty Income. This is due to REITs' reliance on debt and their reputation as bond alternatives, given their steady and substantial dividend payouts.
With Realty Income’s growth potential through acquisitions, the timing of the Fed’s future rate cuts has become increasingly significant for investors. The improving investment landscape has fueled the company’s ambitions, with plans to reach $3 billion in 2024. Additionally, its emphasis on the European markets is a promising sign for future growth.
The other reason why Realty Income is under the spotlight amid a rate cut environment is that it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 24 times in the past five years.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Realty Income remains committed to that. This retail REIT has experienced a compound annual dividend growth of 4.3% since 1994. Additionally, as bond market yields have decreased, O’s forward dividend yield has become more appealing to income investors.
Will the Trend Last for Realty Income?
From being a notable participant in the net lease space to a dominant player in the whole REIT landscape, Realty Income has gone to great lengths and transformed itself over the years, achieving both industry and geographical diversification. Around a decade ago, with omnichannel and e-commerce strategies gaining focus, it diversified its portfolio from retail to single-tenant industrial properties.
In recent years, Realty Income has crossed borders, gaining a foothold in the United Kingdom with long-term net lease agreements with Sainsbury’s grocery chain in 2019, as well as going for a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon in recent times. The improving investment environment, mainly in Europe, further keeps Realty Income’s hopes high.
This REIT further broadened its portfolio diversification with investments in gaming assets like Encore Boston Harbor and The Bellagio Las Vegas. It also entered into a joint venture with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia. Its 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.
The company’s core business is thriving, and an improving investment climate is encouraging it to pursue a more ambitious investment strategy while maintaining highly sustainable dividend payouts. With a strong balance sheet and abundant liquidity, Realty Income is well-positioned to invest more aggressively as market conditions improve.
However, any choppiness in the economy will affect the company’s performance and investments in the upcoming quarters. Additionally, due to its large size, the company may find it difficult to significantly increase FFO and dividends, acquire a substantial number of new properties while maintaining strict quality standards, and translate to meaningful stock price growth.
Estimate Revisions and Valuation
The recent estimate revision trends also mark a bearish view of analysts, with the consensus estimate for adjusted funds from operations (AFFO) per share being revised marginally downward over the past two months for both 2024 and 2025.
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 14.50X. It is at a discount to the industry average of 16.55X but ahead of its 1-year median of 12.81X and close to its high of 15.56X. 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 13.99X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A detailed analysis shows that Realty Income, being sensitive to interest rate fluctuations, has sparked investor enthusiasm following the recent rate cut and anticipation of further cuts. However, any weakening in the broader economy could negatively impact its stock price. Additionally, the company’s large size may pose challenges in driving substantial earnings and profitability growth, which could limit its ability to significantly influence stock price performance.
Analysts share similar views, as reflected in the estimate revision trends, and with the recent rally, the valuation is no longer as attractive as it once was.
Consequently, current shareholders might opt to retain their shares in anticipation of Realty Income implementing its growth strategy. Potential investors should consider waiting for a more advantageous entry point before buying in.
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 Up More Than 18% in 3 Months: Time to Buy or Hold?
After reaching a 52-week high early in September, shares of Realty Income (O - Free Report) are trading 1.4% lower, closing at $62.48 yesterday on the NYSE. Still, it marks an 18.3% increase in the past three months, outperforming the Zacks REIT and Equity Trust - Retail industry’s growth of 16.6% and the S&P 500 composite’s rise of 4.3% over the same time frame.
The recent rate cut and indications of a probable reduction in rates in the upcoming period have significantly contributed to this surge in the stock price of this leader in the net lease sector. Earlier this month, this REIT also came up with a dividend hike announcement, which marked its 127th dividend hike since its listing on the NYSE in 1994. Apart from these, the REIT’s investment plans, with a special emphasis on Europe, have raised investors' optimism about the stock in recent times.
However, investors might be questioning whether they’ve missed their chance to invest or if there’s still time grab it. Let’s delve deeper to assess whether it makes sense to take or increase positions in O or if it’s better to wait for a more favorable entry point.
3-Month Price Performance
Image Source: Zacks Investment Research
What is Driving Realty Income Stock?
Amid indications of a moderation in inflation and a softening of the labor market, the Federal Reserve recently announced a 50-basis point cut to the federal funds rate. It marked the first downward move in four and a half years and will avert a labor market slowdown.
This bodes well for rate-sensitive REITs, such as Realty Income. This is due to REITs' reliance on debt and their reputation as bond alternatives, given their steady and substantial dividend payouts.
With Realty Income’s growth potential through acquisitions, the timing of the Fed’s future rate cuts has become increasingly significant for investors. The improving investment landscape has fueled the company’s ambitions, with plans to reach $3 billion in 2024. Additionally, its emphasis on the European markets is a promising sign for future growth.
The other reason why Realty Income is under the spotlight amid a rate cut environment is that it enjoys a trademark of the phrase “The Monthly Dividend Company” and has increased its dividend 24 times in the past five years.
Solid dividend payouts are the biggest enticements for REIT shareholders, and Realty Income remains committed to that. This retail REIT has experienced a compound annual dividend growth of 4.3% since 1994. Additionally, as bond market yields have decreased, O’s forward dividend yield has become more appealing to income investors.
Will the Trend Last for Realty Income?
From being a notable participant in the net lease space to a dominant player in the whole REIT landscape, Realty Income has gone to great lengths and transformed itself over the years, achieving both industry and geographical diversification. Around a decade ago, with omnichannel and e-commerce strategies gaining focus, it diversified its portfolio from retail to single-tenant industrial properties.
In recent years, Realty Income has crossed borders, gaining a foothold in the United Kingdom with long-term net lease agreements with Sainsbury’s grocery chain in 2019, as well as going for a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon in recent times. The improving investment environment, mainly in Europe, further keeps Realty Income’s hopes high.
This REIT further broadened its portfolio diversification with investments in gaming assets like Encore Boston Harbor and The Bellagio Las Vegas. It also entered into a joint venture with Digital Realty (DLR - Free Report) to facilitate the development of two build-to-suit data centers in Northern Virginia. Its 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.
The company’s core business is thriving, and an improving investment climate is encouraging it to pursue a more ambitious investment strategy while maintaining highly sustainable dividend payouts. With a strong balance sheet and abundant liquidity, Realty Income is well-positioned to invest more aggressively as market conditions improve.
However, any choppiness in the economy will affect the company’s performance and investments in the upcoming quarters. Additionally, due to its large size, the company may find it difficult to significantly increase FFO and dividends, acquire a substantial number of new properties while maintaining strict quality standards, and translate to meaningful stock price growth.
Estimate Revisions and Valuation
The recent estimate revision trends also mark a bearish view of analysts, with the consensus estimate for adjusted funds from operations (AFFO) per share being revised marginally downward over the past two months for both 2024 and 2025.
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 14.50X. It is at a discount to the industry average of 16.55X but ahead of its 1-year median of 12.81X and close to its high of 15.56X. 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 13.99X.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Wrapping Up
A detailed analysis shows that Realty Income, being sensitive to interest rate fluctuations, has sparked investor enthusiasm following the recent rate cut and anticipation of further cuts. However, any weakening in the broader economy could negatively impact its stock price. Additionally, the company’s large size may pose challenges in driving substantial earnings and profitability growth, which could limit its ability to significantly influence stock price performance.
Analysts share similar views, as reflected in the estimate revision trends, and with the recent rally, the valuation is no longer as attractive as it once was.
Consequently, current shareholders might opt to retain their shares in anticipation of Realty Income implementing its growth strategy. Potential investors should consider waiting for a more advantageous entry point before buying in.
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.