Down 19% YTD, Realty Income Stock Has Growth Potential

Despite a 38% rise since the March 23 lows of this year, at the current price of around $60 per share we believe Realty Income stock (NYSE: O) has more to go. Realty Income, a REIT (Real Estate Investment Trust) with a portfolio of more than 6500 commercial properties, has seen its stock rally from $43 to $60 off the recent bottom compared to the S&P 500 which increased almost 60%. The stock has underperformed the broader markets and is down 19% YTD. This is despite the fact that the recent quarters have seen higher revenues on a year-on-year basis – the top line has increased 14% to a consolidated figure of $1.6 billion for the last 4 quarters from $1.4 billion for the 4 quarters before that. That said, the investor sentiment is in general negative toward the REITs like Realty Income, due to a drop in rent collection and occupancy rates driven by the Covid-19 crisis.

The company has seen steady growth in revenue over 2017-2019, and its P/E multiple has also increased. We believe the stock is likely to see some upside in the near term despite the recent rally and potential weakness from a recession-driven by the Covid outbreak. Our dashboard Buy Or Sell Realty Income Stock? provides the key numbers behind our thinking.

Realty Income’s revenue increased 23% from $1.2 billion in 2017 to $1.5 billion in 2019, which translated into a 37% growth in net income figure over the same period. The net income benefited from a slight decrease in general and administrative cost as a % of revenues, improving the net income margin from 26.3% to 29.3%.

During the same period, the P/E multiple increased from close to 52x to just above 53x. While the company’s P/E is around 43x now, there is an upside when the current P/E is compared to levels seen in the past years – P/E of 50x at end of 2018 and 52x at the end of 2017.

Where Is The Stock Headed?

Realty Income, also known as “The Monthly Dividend Company,” pays monthly dividends to its shareholders that increase over time. The company holds a diversified portfolio of properties spread across 49 U.S states and tenants doing business in 50 industries, which generates rental revenue under long-term net lease agreements. The REIT has reported positive revenue growth in the first three quarters of 2020 mainly driven by growth in retail assets – up 13% y-o-y, leading to higher rental revenues. However, the same is not reflected in its net income which was reduced by 11%, driven by a $123 million provision for impairment losses related to rent-deferrals. Due to the Covid-19 pandemic and lockdown restrictions, businesses have suffered significant losses, resulting in lower rent collection rates and rent-deferral requests. However, as the economy moves towards normalcy, the financial health of its tenants is likely to recover, reducing the risk of rent defaults.  Overall, the Realty Income stock is likely to see some upside in the near term.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again.  

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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