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Realty Income(O) – Recession-Proof Dividend Cashcow

Realty Income, The Monthly Dividend Company, is one of the few dividend stocks which pays monthly dividend income for their shareholders. Real Estate investment trusts are a very good opportunity for the younger audience to invest in the Real Estate market. It is a cheaper and more accessible way than investing in a rental property.

The company’s cash flow is secured from over 6,500 real estate properties owned under long-term lease agreements with their commercial clients. Low-risk properties, well-diversified after all. The company is a member of the S&P 500 Dividend Aristocrats index. 

Quick note what you should know about the long-term lease agreements: Triple net leases are one of the best leases, the tenant is willing to handle every expense of the property.”

S&P Rating: A- Market Cap: $41b

Quick Note: What is a REIT? REITs, or real estate investment trusts, are companies that own or finance income-producing real estate across a range of property sectors. These real estate companies have to meet several requirements to qualify as REITs. REITs must payout at least 90 % of their taxable income to shareholders(dividends)—and most payout 100 %. In return, shareholders pay the income taxes on those dividends. 

Current situation and growth standpoint…

Most people invest in REITs because of the income it generates but I would like to see also some growth over the years. In the last 5 years, the return on my money was 10% which is a decent growth in my opinion and if we take a look over the last 20 years then we can see a 650% return on our investment.

PE ratio isn’t the tool that we use if it comes to REITs. P/FFO ratio(the blue line) is much better and this is only 17.1. From one perspective it is a likable number under 25 but on the chart, you can see where the blue line would be the likable price for O. Right now the price is slightly above this line. In my opinion, it is in the good buy/hold category.

PS.: The company didn’t get any major price hit so it can be called „Recession-proof”.

Future forecasting and estimates

The estimated performance in the next 3 years on the Operating Cashflow based on 14 analysts will be 12,3% per year which is above the market growth but the revenue won’t follow that trend, unfortunately.

From a dividend standpoint…

Like I just said, this is the part of why we are investing in REITs. Realty Income is a dividend champion. 28 years of dividend increasing record, all together they increased their dividend 109 times since Realty Income’s public listing in 1994 (NYSE: O). The current yield is 4,35% which is very good. 

If you want to take your stake from O then it is a perfect time! Buy some shares before 30. July is the Ex-dividend date and take your first check!

They increase their dividends by 2-4% every year which is a little bit low in my opinion. The dividend amount that they are paying isn’t well covered by the cash flow; by REIT we have to look for the Operating Cashflow and not the Free Cashflow. A healthy number would be this number under 75% to have. They had this number always above 85%.

Fair value 

I use the most widely accepted method to calculate the fair value of a company which is the Discounted Cash Flow(DCF). It is based on the premise that the fair value of a company is the total value of its future free cash flows (in this case I use AFFO) discounted back to today’s prices. I use analysts’ estimates of cash flows and assume the company grows at a stable rate into perpetuity.

(Total Equity Value = Present value of next 10 years cash flows + Terminal Value = $25.342 + $69.755= $95 097,27
Equity Value per Share (USD) = Total value / Shares Outstanding = $95.097 / 602= $157.95)

Undervalued by 56.8%. The current fair value is $157.95

Risks and the overall takeaway

As I see it, it is a good income generator company with a reasonable dividend yield. Warren Buffett’s main holdings and the ling term leases are very good signs of a healthy company. Won’t overgrowth the S&P500 growth rate or so but if you need cashflow…

 The only reason why it could be a little bit of a volatile investment is that we are in a period of rising interest rates. 

Competitors which worth taking a look at FRT, NNN

Disclosure: I have no stock, option, or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I have no business relationship with any company whose stock is mentioned in this article.

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