Realty Income Corp (O): A Premium Monthly Dividend Stock

Dividend Analysis: Realty Income

We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Realty Income’s long-term dividend and fundamental data charts can all be seen by clicking here.

Dividend Safety Score

Our Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more. Scores of 50 are average, 75 or higher is very good, and 25 or lower is considered weak.

Realty Income has a Dividend Safety Score of 72, which suggests the company’s current dividend payment is very safe.

One of the most important financial ratios for dividend investing is the payout ratio. While net income is used for most companies to compute the calculation, REITs face several complications.

Since REITs own a lot of property, they record substantial non-cash depreciation charges each year, reducing their net income. However, the value of real estate tends to rise over time, creating a mismatch between accounting and reality.

For this reason and others, real estate businesses use a supplemental measure called “adjusted funds from operation” (AFFO) in place of net income to get a better sense of their true dividend payout ratios.

AFFO measures cash flow by removing the non-cash impact of real estate depreciation along with several other adjustments to give a truer look at a company’s actual operating performance.

Realty Income expects AFFO per share of $2.85 to $2.90 in 2016, resulting in a payout ratio of approximately 83%.

I generally prefer companies with lower payout ratios to provide a greater margin of safety, but I will make exceptions for companies with extremely dependable earnings.

Realty Income seems to fit the bill. The company’s long-term leases, consistently strong occupancy rates, quality real estate locations, business diversification, and financially healthy tenants alleviate most of the concerns associated with a high payout ratio.

As seen below, the company has consistently grown its revenue and fared well throughout the last recession, seeing sales dip by just 1% in fiscal year 2009. A high payout ratio isn’t as much of a concern if a company’s results are stable throughout most economic environments.

Source: Simply Safe Dividends

Realty Income’s solid Dividend Safety Score is further supported by its conservative capital structure and diversified mix of rent revenue.