Dear Mr. Berko: My stockbroker is very enthusiastic about Realty Income Corp. and has advised me to buy 400 shares. He is impressed with the company’s growth in revenues and dividends and likes the fact that about 80 percent of the dividend received from this stock wouldn’t be taxed. He says it would be considered return of capital. Didn’t you recommend this stock about three years ago? — PR, Oklahoma City
Dear PR: Yes, I did. It was $46, and I bought 50 shares for each of my grandkids.
Realty Income (O-$53) is cut from a different bolt of cloth than most of its brethren. This real estate investment trust pays its dividend every month, and lots of retired folks who depend on dividends think that’s just ducky. This REIT owns 5,193 stand-alone, single-tenant commercial properties, totaling 91 million square feet in 49 states. All of O’s properties have triple-net leases, under which the tenants are responsible for taxes, maintenance and insurance. O’s 151 employees in San Diego collect rent and, on some contracts, also a teeny percentage of the lessees’ annual gross revenues. O collects rent from darn good names, such as Taco Bell, Walgreens, FedEx, Publix, Panera Bread, CVS, Dollar General, Uncle Sam’s, CarMax, BJ’s Wholesale Club, Firestone, Walmart, AMC Theatres, 3M, Rite Aid, Regal Cinemas, Circle K and LA Fitness. And sometimes O will sell those leases to pension funds and high-net-worth individuals and use that money to purchase similar-yielding properties.
O has paid a dividend for nearly 21 consecutive years. That dividend has been increased 95 times during that time frame, and the dividend coverage, at 83 percent of funds from operations, is fairly strong. In 2017, O invested about $1.5 billion and acquired over 300 new properties containing nearly 8 million square feet, the income from which certainly supports a dividend increase this year. Realty Income has had a long history of high occupancy and rising rents. The occupancy rate of O’s properties was an impressive 98.4 percent last year, and Wall Street’s REIT gurus watching the stock suggest this occupancy rate will be the norm for the coming two to three years. During each of the past three years, the average rent moved up by 1 percent, to $13.77 a square foot, and the Street’s REIT gurus believe that O will experience similar gains in the coming years. If inflation becomes a factor — and it will — the increasing value of O’s properties could be impressive.
O has a strong balance sheet. Debt was $5.8 billion in 2016 and $6.1 billion in 2017. And the ratio of debt to total capital stood at 45 percent last year, so management has significant borrowing capacity for future acquisition investments. Net profit margins should improve from 24.8 percent to 28.2 percent this year, go to 28.4 percent in 2019 and fly even higher in succeeding years. Last year’s dividend of $2.53 has already been increased to $2.63, and by year’s end, it may total $2.70. That’s a very nice forward yield of 5.2 percent. If you don’t need the dividends for a while, please reinvest them. The broker wouldn’t charge you to reinvest those dozen yearly dividends. Now, if you had bought 100 shares of O 10 years ago and reinvested the 120 dividends, you’d have 690 shares worth about $36,500 today. That’s not too shabby. It computes to an average annual total return of 13.75 percent. Wow! That exceeds the 10-year S&P 500 and the 10-year Dow Jones industrial average results. This small dividend reinvestment return builds slowly, though impressively, and is sort of like watching a turtle on amphetamine.
Realty Income is a solid buy at the current price for conservative long-term investors. The company’s tenant base is represented by a solid mix of defensive and e-commerce-resistant names that should allow O to weather future retail storms. Equity analyst Brad Schwer tells us that 90 percent of O’s rental income consists of lessees with “non-discretionary, service-oriented, or low-price components to their businesses.” He has a $59 fair value estimate for O.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at [email protected]. To find out more about Malcolm Berko and read features by other Creators Syndicate writers and cartoonists, visit the Creators Syndicate website at www.creators.com.
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