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Stock Analysis & Ideas

Realty Income Ready to Reap Upside

I am bullish on Realty Income (O) as its strong recent performance momentum, overwhelming analyst bullishness, compelling competitive advantages, track record, and attractive dividend yield plus growth profile make it currently considerably appealing.

Realty Income is the leading global and triple net lease real estate investment trust (REIT) with a presence in the U.S., Puerto Rico, and Europe. It owns well over 11,000 individual properties and generates very predictable cash flows through its triple net lease contracts. Its properties are leased to over 250 tenants across nearly 50 industries, making it a very well-diversified real estate portfolio that can be counted on to generate reliable income for investors. Realty Income is often referred to as “The Monthly Dividend Company” given its popular monthly dividend payout policy, which contrasts with its peers that tend to pay out dividends on a quarterly basis.

In this article, I will lay out multiple reasons why I am bullish on O stock at current prices.

Rock Solid Q1 Results

In a world filled with uncertainty, O stock continues to stand out as a source of reliability and stability for investors looking for a steady income stream that they can count on. In O’s Q1 results, the REIT reported an impressive 99.2% occupancy rate, up 30 basis points sequentially and matching an all-time high. The company also generated very strong releasing spreads of 6.2%, reflecting the durable value of its portfolio. Meanwhile, O saw 4.1% growth in same-store net operating income. These strong results led to 14% year-over-year growth in adjusted funds from operations (AFFO) per share.

On top of the strong results, the forward growth profile remains solid as management continues to find ways to deploy large amounts of capital to keep growing the portfolio. In Q1, management announced that it had agreed to acquire the $1.7 billion Encore Boston Harbor Resort and Casino at a 5.9% initial cap rate, with a 30 year lease attached to the property.

Stellar Track Record

Few REITs can match O’s track record as the company has grown its annualized dividend payout for 26 consecutive years. Moreover, the firm has one of the strongest balance sheets among all REITs, and has generated total returns far in excess of the broader REIT sector and S&P 500 (SPX).

Such consistently strong and overall impressive results reflect the sound capital allocation policies of the REIT’s management team. By keeping the balance sheet strong, management has been able to respond opportunistically to downturns in the economy to make new acquisitions at attractive prices. Furthermore, its strong credit rating earns it a cost of capital advantage, as it is able to borrow money on more advantageous terms than its competitors do. This enables it to compete for higher quality and larger deals than most of its competitors can, giving it a clear competitive advantage in capturing lucrative growth opportunities, all while keeping risk low.

Attractive Stock Price

In addition to its strong recent results, stellar track record, and clear competitive advantages, O’s stock price looks rather attractive at the moment.

Wall Street analysts appear to be quite bullish on the stock. According to TipRanks, O earns a Strong Buy analyst consensus rating, based on eight Buys ratings and one Hold Rating assigned in the past three months. Additionally, the average O price target of $76 puts the upside potential at 11.78%.

On top of that, the stock price has pulled back sharply in recent weeks from its 52-week high of $75.40 to $67.99, as of this writing. The dividend yield is now over 4.4% and analysts expect the dividend per share to continue growing at a CAGR greater than 5% over the next half decade.

Given the strength of the balance sheet, business model, and the excellent track record for the business, generating a 10% total yield plus growth looks to be quite attractive, especially in a macroeconomic environment where many experts are increasingly forecasting a recession.

Summary & Conclusions

O is one of the most highly regarded REITs in the publicly traded market today, thanks to its stellar track record and continued success at growing its massive portfolio in a value-accretive manner for shareholders.

The company has an extremely well diversified portfolio of high quality real estate that makes it a very conservative bet on the real estate industry.

Given that analysts are overwhelmingly bullish on the stock, its dividend yield of 4.4%, and solid growth potential alongside low downside risk, investors might want to consider adding shares. With rising macroeconomic risks, O looks like it might be one of the better places for investors to take refuge.

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