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Is Realty Income's (O) Latest Dividend Hike Sustainable?

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Delighting its shareholders, Realty Income Corporation (O - Free Report) announced its 114th common stock monthly dividend hike since the company’s NYSE listing in 1994. The company will pay 24.65 cents per share in dividend compared with 24.6 cents paid earlier.

The increased dividend will be paid out on Jan 14 to shareholders on record as of Jan 3, 2022. The latest dividend rate marks an annualized amount of $2.958 per share versus the prior rate of $2.952. Based on the company’s share price of $67.22 on Dec 15, the latest hike results in a dividend yield of 4.4%.

Solid dividend payouts are the biggest enticements for REIT investors and Realty Income is committed to boosting its shareholder wealth. This retail REIT holds the trademark of the phrase “The Monthly Dividend Company.” In November, it raised its dividend to 24.6 cents per share from 23.6 cents paid earlier. The increased dividend was paid out on Dec 15 to shareholders on record as of Dec 1, 2021.

Though the latest hike marks a marginal increase from the prior dividend, the January payout will be the company’s 618th consecutive monthly dividend payment in its 52-year operating history. O has made 97 consecutive quarterly dividend hikes. This retail REIT has witnessed compound average annual dividend growth of 4.5% since its listing on the NYSE.

The latest hike reflects Realty Income’s ability to generate decent cash flow through its operating platform and a high-quality portfolio. Realty Income announced the completion of the merger with VEREIT on Nov 1. The combined entity is poised to benefit from the enhanced size, scale, diversification and synergies.

According to Sumit Roy, president and the chief executive officer of Realty Income, "As we approach the end of 2021, I'm pleased that our Board of Directors has once again determined that Realty Income can increase the amount of the monthly dividend."

The current cash-flow growth rate is 4.33% against the industry average of a negative 21.22%. This implies that the increased dividend will likely be sustainable.

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 and competition from Internet retailing. This boosts the stability of rental revenues and generates predictable cash flows. Through Sep 30, management noted that O collected 99.5% of the contractual rent due for the third quarter across the total portfolio.

Realty Income exited the third quarter of 2021 with $3.1 billion of liquidity. The company ended the quarter with modest leverage and strong coverage metrics with a net debt to EBITDAre of 5.0X and a fixed charge coverage of 6.1X that hit an all-time high for the third quarter in a row. Further, Realty Income has a well-laddered debt-maturity schedule with a weighted average maturity of 8.3 years. Manageable near-term maturities and ample liquidity provide the company with the financial flexibility to tide over any mayhem and ride on growth opportunities. 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.

Shares of this Zacks Rank #3 (Hold) company have rallied 3.6% so far in the quarter compared with the industry’s rise of 3%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Zacks Investment ResearchImage Source: Zacks Investment Research

Stocks to Consider

Some better-ranked stocks from the REIT sector include Simon Property Group (SPG - Free Report) , Federal Realty Investment Trust (FRT - Free Report) and Tanger Factory Outlet Centers, Inc. (SKT - Free Report) .

Simon Property Group currently holds a Zacks Rank of 2 (Buy). Simon Property’s projected long-term growth rate is 9.70%.

The Zacks Consensus Estimate for SPG’s 2021 FFO per share has been revised 2.1% upward in a month. This also suggests an increase of 26.5% year over year.

Currently, Federal Realty sports a Zacks Rank of 1.  Federal Realty’s projected long-term growth rate is 9.9%.

The Zacks Consensus Estimate for FRT’s ongoing-year FFO per share has moved marginally north to $5.40 over the past week, suggesting an increase of 19.5% year over year.

Tanger Factory currently carries a Zacks Rank of 1. Tanger Factory’s projected long-term growth rate is 3.9%.

The Zacks Consensus Estimate for SKT’s 2021 FFO per share has been revised 6.8% upward in a month.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.