1 Monthly Dividend Stock Analysts Rate Highly

Realty Income (NYSE:O) is among the most popular stocks with dividend investors because it has an unusual feature versus most other dividend stocks; it pays monthly.

It also pays a really compelling 6.20% yield, which eclipses the interest a 3-month Treasury bill offers. Where the difference lies is the T-bills are risk-free, and guarantee no more and no less than the current 5.61% whereas Realty Income has both a higher reward and risk potential.

If you are to buy the stock you’ll want to have confidence it is undervalued at this time given how close its dividend yield is to 3-month T-bills.

Is Realty Income Stock Undervalued?

Analysts are overwhelmingly positive on Realty Income and have placed a $68.27 consensus price target on it. That translates to upside potential of 35% from where the O stock presently sits.

We wanted to corroborate that view by the Street’s research analysts and ran a discounted cash flow forecast analysis, which placed fair value close to $59.50 per share, representing upside of 18.9%. It’s not quite as elevated as the average price target from analysts but it does signify O stock is on sale at this time.

With that said, there is a caveat that any dividend-seeking investor should have their eye on. Realty Income has a payout ratio of 223%, a figure well above the 50% we like to see to be confident the dividend will be sustainable over time.

On the plus side, the Realty Income board has a 26 year streak of paying out a dividend to shareholders, so it’s unlikely that they will halt it anytime soon but they certainly may be tempted to reduce it. 

For many shareholders, the purpose of holding the stock is precisely for its attractive yield, as well as the monthly distributions. To cut that payout in half would result in the share price crumbling too.

So what are the odds of that happening? We took a closer look at the financials.

3 Year Revenue Streak Is Impressive

For a REIT, O certainly does impress on the top line. We analyzed the financial statements for the past 3 years and couldn’t find a single quarter where year-over-year revenue growth wasn’t in the black.

Not only that but the yearly revenue growth appears to be accelerating. For example, the last two quarters of 2020 had growth of 8.1% and 4.0% respectively whereas, two years later, the same quarters reported revenue growth year-over-year of 70.8% and 29.5%.

Operating income appears to have tripled from three years ago, so what’s causing the share price to drop? It’s down 21% for the year and 8.97% for the past month alone.

Why is Realty Income stock down? Higher interest rates have spooked investors who think the company’s brick-and-mortar business is likely to run into headwinds as tenants struggle to keep pace with the economic slowdown.

A concern we also have is the debt level relative to the cash on the balance sheet. Of course, the model of the company is to take on debt to acquire assets, but $20.2 billion of debt against just $253 million of cash is concerning.

A bull might argue that, while these figures are correct, the company also has $53 billion of assets into which it can tap by disposing some of them to raise cash. 

Of course, this is true but it doesn’t invalidate the argument that management is flying a little too close to the sun when it comes to having razor thin cash on-hand.

Realty Income Has a Great Model

What cannot be denied is the highly attractive business model Realty Income has built which is likely to stand up better than most REITs to a rising interest rate environment.

What makes the company special is its long-term NNN (or triple-net) leases which puts the responsibility for taxes, maintenance, and insurance on tenants. For Realty Income, the benefit is lower overhead costs and operational expenses. 

It’s also a highly diversified company with over 13,100 properties at last count spread across every state in the union, and with an international presence in Europe. In addition, the company services 85 industries and has a highly diversified portfolio as a result.

Will Realty Income Stock Bounce Back?

One of the world’s top investors over the past 40 years has been Stanley Druckenmiller and he has famously boiled successful investing down to “good fundamentals and a good chart”, meaning the stuff Warren Buffett pays closest attention to, the financials are crucial, but for him they are not sufficient.

Stanley is worth listening to because while Buffett has outperformed the market, no doubt, Druckenmiller has never had a down year.

In addition to solid financials, Druckenmiller likes to see a good-looking chart, or in other words, a series of higher highs and higher lows when making a bullish bet. We’re interpreting to some extent precisely what technical analysis pattern he prefers but what’s clear now is that the series of lower lows and lower highs that Realty Income is displaying doesn’t qualify as a a good-looking chart, yet.

When the trend turns, and sentiment shifts from highly negative to modestly positive on Realty Income, the odds are that both of Druckenmiller’s criteria will be met, the fundamentals and chart will look good.

For now, it checks one box but not the other. As such, Realty Income might be undervalued and pay a handsome dividend yield, but until the share price plunge stalls and plateaus and starts to turn back upwards, this stock is perhaps best left to the bottom fishers.

They may be lucky to buy the low, but it’s a risky game to play. We would prefer a wait-and-see approach until both boxes can be checked.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.