Not every stock has soared in the latest bull market. Consider Realty Income (NYSE: O) , which has seen its shares fall by almost 35% from their 2019 high. A combination of pandemic-related closures and rising interest rates have weighed on the real estate investment trust (REIT).
Nonetheless, Realty Income's business and dividend have grown amid the struggle. Considering the REIT's property portfolio and diverse client base, the stock sells at a discount that should draw investors, especially those focused on income.
What is Realty Income?
Realty Income owns approximately 15,500 single-tenant properties in the U.S. and seven European countries. It rents them to tenants as a net lease, meaning the tenants cover the taxes, insurance, and maintenance costs on its properties.
Its tenants include some of the best-known and most stable companies in existence. Walmart , Dollar General , and Wynn Resorts are just some of its clients.
With this diverse client base, occupancy stands at nearly 99%. In January, it also completed its takeover of Spirit Realty, which added more than 2,000 properties. Additionally, it has 155 properties it is purchasing or developing, so its expansion continues amid the challenges.
That steady development should bolster the reputation it has built as "the monthly dividend company." As the name implies, shareholders have received a payout every month since it began paying dividends in 1994.
This payout has risen at least once yearly, even as the stock has struggled over the last few years. Today, shareholders receive almost $3.16 per share annually. Thanks to this rising payout and the lower stock price, its dividend yield has reached 6%, far above the average 1.3% yield for the S&P 500 .
Realty Income and its financials
Despite concerns about interest rates, the company generated almost $1.3 billion in revenue in the first quarter of 2024. That's a 34% increase, most of which came about from the Spirit Realty acquisition.
Admittedly, higher depreciation and interest costs weighed on profits, and Q1 net income fell 42% to $130 million as a result.
Nonetheless, funds from operations (FFO) income attributable to shareholders, a measure of Realty Income's free cash flow , were $786 million, or $0.94 per share. Since cash dividends per share were $0.77 for the three-month period, its payout is sustainable.
With the acquisition, Realty Income forecasts a 23% increase in revenue for 2024. Analysts also predict that the yearly growth rate will slow to 7% by 2025, a testament to the company's ability to grow organically.
Amid the stock's struggles, this growing cash flow stream has helped make Realty Income a bargain. The stock is currently around $52 per share, which prices it at about 13 times its FFO. Hence, not only can investors buy a robust and growing stream of cash flows, they can also buy this stock at a considerable discount.
Consider Realty Income
Ultimately, investors looking to bolster an income-oriented portfolio should consider Realty Income at current levels. The market seems to have punished the stock for its lower net income amid higher interest rates, but higher rates have not stopped its expansion or interrupted the dividend growth. Consequently, new shareholders will earn a cash yield of 6%, a return that should continue to grow if current trends are any indication.
Furthermore, rental income from its stable client base should continue to bolster its expansion. Given its continuing growth amid its challenges, income investors should buy now while the stock sells at a considerable discount.
Will Healy has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool has a disclosure policy .
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