National Retail has managed to significantly grow its business without sacrificing its profitability. As seen below, the company has maintained a reasonable return on equity in the mid- to high-single digits over the last decade. REITs are capital intensive, but National Retail has been generating a fair return on its investments for shareholders.
Source: Simply Safe Dividends
Overall, we think National Retail’s dividend looks pretty safe. We like the company’s diversification across the retail sector and believe management will continue to conservatively manage the business to keep it protected during times of unexpected duress.
Dividend Growth Score
Our Growth Score answers the question, “How fast is the dividend likely to grow?” It considers many of the same fundamental factors as the Safety Score but places more weight on growth-centric metrics like sales and earnings growth and payout ratios. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.
National Retail’s Dividend Growth Score of 21 suggests the company’s dividend growth potential is rather weak. Despite the company’s solid track record of raising its dividend for 26 consecutive years, we can see below that dividend growth has only averaged about 3% for most the past decade. However, the company would still be a member of the dividend aristocrats list if it was big enough to be in the S&P 500.
Source: Simply Safe Dividends
Since REITs pay out most of their income as a dividend and are generally mature, capital-intensive businesses, dividend growth is often relatively low but reliable. We expect National Retail’s dividend growth to continue at a 2-4% annual pace.
Valuation
NNN’s stock trades at 19.4 times estimated 2016 FFO per share and has a dividend yield of 3.8%, which is significantly lower than its five-year average dividend yield of 4.9%.
National Retail’s strategy has generated on average annual 9% recurring FFO per share growth since 2012, but growth largely depends on acquisitions. If we assume that FFO per share grows at a mid-single digit pace going forward, the stock appears to offer total return potential of 8-11% per year.
However, it’s hard to ignore the run that NNN has had. The stock has surged nearly 30% over the last six months and trades at a premium multiple and dividend yield relative to its history. We believe this was fueled at least in part by investors’ looking even harder for income after the Fed moderated its projected number of interest rate increases this year.
Simply put, it’s hard to make a strong valuation case today despite NNN’s strong business fundamentals. REITs can be one of the best stock sectors for dividend income, but that doesn’t always mean they are attractively priced or worth the capital market risk.
Conclusion
National Retail Properties, Inc. (NYSE:NNN) is just one of four publicly traded REITs to increase its dividend for at least 26 consecutive years and shares many qualities with our favorite blue-chip dividend stocks.
Management has clearly managed the company conservatively over the years, and National Retail’s diversification by customer, industry, and geography provides further confidence in the dividend growth story continuing.
We think National Retail has solid long-term prospects, but the stock’s valuation admittedly looks a bit rich at the moment.
Disclosure: None
