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Is Realty Income's (O) 111th Monthly Dividend Hike Sustainable?

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Realty Income Corporation (O - Free Report) recently announced the 111th common stock monthly dividend hike since the company’s NYSE listing in 1994. The company will now pay 23.55 cents per share compared with the 23.50 cents paid earlier.

The increased dividend will be paid on Jul 15, to shareholders on record as of Jul 1, 2021. The latest dividend rate marks an annualized amount of $2.826 per share versus the prior rate of $2.82 per share. Based on the company’s share price of $69.61 on Jun 15, it results in a dividend yield of 4.06%.

Solid dividend payouts are the biggest enticement for REIT investors, and Realty Income is committed to boosting shareholder wealth. Remarkably, this retail REIT enjoys a trademark of the phrase “The Monthly Dividend Company”.

The latest hike comes by a marginal figure from the prior dividend paid, but the July dividend payment marks the company’s 612th consecutive monthly dividend payment in its 52-year operating history. Encouragingly, the company has made 95 consecutive quarterly dividend hikes. The retail REIT has witnessed compound average annual dividend growth of 4.4% since its listing on the NYSE.

The latest hike reflects Realty Income’s ability to generate decent cash-flow growth through its operating platform and high-quality portfolio. With a current cash-flow growth rate of 4.33%, as against the industry’s average of a negative 21.32%, the increased dividend is likely to be sustainable.

Notably, Realty Income derives 95% of its annualized retail contractual rental revenues from tenants with a service, non-discretionary and/or low-price-point component to their business. Such businesses are less susceptible to economic recessions as well as competition from Internet retailing. This boosts the stability of rental revenues and generates predictable cash flows.

Particularly, the company’s top four industries (represent more than 37% of rental revenues as of Mar 31, 2021) — convenience stores (accounting for 12% of revenue), grocery stores (10%), drug stores (7.9%), and dollar stores (7.4%) — sell essential goods and continued to thrive even amid the pandemic. As such, the company has received nearly all of the contractual rent due from tenants in these industries since the pandemic started.

Through Mar 31, 2021, the REIT has collected 94.1% of contractual rent due for the first quarter across its total portfolio. Further, it has collected 89.8% of contractual rent due for the first quarter from the top 20 tenants and 100% of contractual rent from its investment-grade tenants. In addition, situations have improved now compared to the outbreak of the pandemic and with vast majority of Realty Income’s retail locations being now open, rent collection trends are likely to improve further.

Realty Income has emerged as a company with decent financial health through its efforts to boost balance-sheet strength despite such a crisis. The retail REIT exited first-quarter 2021 with $2.5 billion of liquidity, including nearly $184 million of cash and equivalents. The company had full availability of its $3 billion multi-currency revolving credit facility and $675 million outstanding under the $1-billion commercial paper program. The company ended the quarter with modest leverage and strong coverage metrics. Further, Realty Income has a well-laddered debt-maturity schedule with weighted average maturity of 8.7 years. Manageable near-term maturities and ample liquidity provide the company with financial flexibility to tide over any mayhem. Further, Realty Income has a credit rating of A- and A3 from Standard & Poor’s and Moody’s, respectively, enabling it to procure debt financing at attractive costs.

Markedly, retail REITs, which have already been battling store closures and bankruptcy issues, suffered the brunt of the pandemic with e-commerce adoption increasing by manifolds, and social-distancing requirements affecting customer traffic and rental collections from tenants. In fact, apart from Realty Income, this turbulence has affected other retail REITs, including Macerich (MAC - Free Report) , Simon Property (SPG - Free Report) and Kimco (KIM - Free Report) among others.

For Realty Income, too, its tenants from theatre as well as health and fitness industries are being impacted by the coronavirus crisis. Nevertheless, the reopening of the economy is raising hopes and comes as a breather for retail landlords.

Shares of this Zacks Rank #3 (Hold) company have gained 14.1% over the past six months compared with the industry’s rally of 27.8%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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