We came across a bullish thesis on Realty Income Corporation (O) on Value Investing Subreddit Page by Overall_Sport_7693. In this article, we will summarize the bulls’ thesis on O. Realty Income Corporation (O)’s share was trading at $54.06 as of Jan 29th. O’s trailing and forward P/E were 51.49 and 35.84 respectively according to Yahoo Finance.
A wide angled view of a large office building owned by the REIT-Mortgage company, highlighting their commercial real estate investments.
Realty Income (O) has faced significant challenges in recent years, primarily due to the surge in inflation and interest rates, which have placed considerable pressure on real estate investment trusts (REITs) like Realty Income. High interest rates have raised interest expenses across the sector, reducing the present value of future earnings and compressing price-to-FFO (Funds From Operations) ratios. This headwind has contributed to Realty Income’s underperformance relative to the S&P 500 over the past five years, with the stock dropping 30% versus the S&P’s 85% gain (excluding dividends). As a result, Realty Income is currently trading near its 4-year lows.
Despite these challenges, Realty Income boasts a robust balance sheet and a rare combination of strengths that allow it to cover its interest expenses comfortably. The REIT continues to grow its FFO per share year after year and is trading at a valuation approximately 30% cheaper than its historical averages. This presents a compelling upside potential of roughly 43% when interest rates eventually moderate. Investors are also benefiting from a nearly 10-year high dividend yield of 5.7%, with the company paying monthly dividends and maintaining a remarkable record of 109 consecutive dividend increases. Realty Income’s healthy payout ratio of 76% and its consistent growth prospects suggest that the company will continue to raise dividends for many more years.
Realty Income’s business model is centered on single-tenant net lease properties, which offer significant flexibility and stability. These properties can be sold individually and redeveloped once vacated, with tenants responsible for taxes and capital expenses. The REIT’s market-leading occupancy rate of around 99% and its steady growth in FFO per share, averaging 5.5% annually over the past decade, reflect the strength of its portfolio and management. Even during past economic downturns, such as the Great Recession and the pandemic, Realty Income has consistently raised its dividend, demonstrating resilience in challenging times. The REIT’s interest coverage ratio of 2.3 and its strong credit ratings (A3/A-) further underline its financial stability.
Looking ahead, Realty Income has ample room for continued growth, particularly with its recent expansion into data centers, a sector poised for growth due to the boom in AI. The REIT’s total addressable market is estimated at $13.9 trillion, offering significant opportunities for future expansion. Analysts project annual FFO per share growth of 3%-6% over the next few years, further strengthening the investment case. With a dividend yield of 5.7% and a strong growth trajectory, Realty Income is well-positioned to deliver returns similar to its historical average annual total return of 11%.
Currently, Realty Income trades at a price-to-FFO ratio of 13.2, a nearly 10-year low, significantly below its historical average of 19.0. If inflation cools and interest rates decrease in the future, the stock’s valuation could revert to historical levels, presenting a 43% upside purely from valuation expansion. While near-term catalysts for lower interest rates are uncertain, the current government is likely to focus on taming inflation to maintain political support. As inflation moderates, interest rates may decrease, providing a tailwind for Realty Income’s valuation.
In conclusion, Realty Income offers investors a unique opportunity to lock in a high dividend yield of 5.7% while waiting for inflation and interest rates to normalize. With its strong balance sheet, healthy payout ratio, and resilient business model, Realty Income is well-positioned to continue raising dividends for many years. The stock’s current valuation provides a compelling entry point, with the potential for significant upside once interest rates stabilize.
Realty Income Corporation (O) is not on our list of the 30 Most Popular Stocks Among Hedge Funds. As per our database, 23 hedge fund portfolios held O at the end of the third quarter which was 19 in the previous quarter. While we acknowledge the risk and potential of O as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than O but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article was originally published at Insider Monkey.