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O Stock Falls 6.9% From Its 52-Week High: Should You Buy the Dip?
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After reaching a 52-week high last week, shares of Realty Income (O - Free Report) are trading 6.9% lower, closing at $60.41 yesterday on the NYSE. While it marks a 12.7% increase in the past six months, the stock has underperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 19.5% and the S&P 500 composite’s rise of 16% over the same time frame.
Before the recent decline, this leader in the net lease sector had witnessed a decent surge in the stock price, thanks to the September rate cut and indications of a probable reduction in rates in the upcoming period. However, of late, volatility has been creeping into the market ahead of the U.S. Presidential Election, the Fed’s FOMC meeting and geopolitical conflicts in the Middle East. Treasury yields have continued the ascent. The market is brooding about what the Central Bank’s stance will be on rates and is concerned about the tone of the post-FOMC meeting statement by Fed Chairman Jerome Powell in November.
Nevertheless, Realty Income has inherent strength, with its portfolio comprising a significant portion of top industries selling essential goods and services. It derives a majority of its annualized contractual rents from tenants with a service, non-discretionary, low-price-point component to their business, assuring stable revenue generation. The company’s accretive buyouts and diversification, backed by a healthy balance sheet, bode well for long-term growth.
Six-Month Price Performance
Image Source: Zacks Investment Research
Let’s understand these factors in detail to better analyze how to play the stock after the price decline.
Resilient Business Model, Expansionary Efforts to Drive O
Realty Income has achieved substantial growth and diversification, transitioning from a net lease participant to a dominant REIT with a varied portfolio across industries and geographies. Over the past decade, the company strategically diversified beyond retail into single-tenant industrial properties, responding to the rise of e-commerce and omnichannel strategies. This evolution has strengthened its market positioning and reduced dependence on any single asset class.
The company’s international expansion, especially in Europe, adds another layer of growth potential. It gained a foothold in the United Kingdom with long-term net lease agreements with Sainsbury’s grocery chain in 2019 and recently opted for a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon in recent times. The investment climate in Europe remains favorable, presenting opportunities for continued growth abroad and enhancing Realty Income’s global footprint.
Further diversification into non-traditional assets, like gaming and data centers, has bolstered Realty Income’s portfolio. Investments in high-profile properties, such as the Encore Boston Harbor and Bellagio Las Vegas, plus a joint venture with Digital Realty (DLR - Free Report) for data centers in Northern Virginia, add valuable diversity. The January 2024 merger with Spirit Realty Capital also increased its scale, strengthening Realty Income’s industry positioning.
Image Source: Realty Income Corporation
Realty Income’s resilient portfolio is spread across tenant types, industries and geographies, mitigating risks associated with any one sector. With properties in all 50 U.S. states, the U.K. and six other countries in Europe, the company also leases to stable industries, including grocery, convenience and dollar stores, which are less vulnerable to economic downturns and online competition. Its tenant roster comprises names like Dollar General Corporation (DG - Free Report) and Dollar Tree, Inc. (DLTR - Free Report) , among others. As of mid-2024, 36% of rental income is sourced from investment-grade tenants, enhancing cash flow stability.
Image Source: Realty Income Corporation
Operating with a high occupancy rate of 98.8% as of June 30, 2024, Realty Income’s high-quality real estate assets and prudent acquisitions have kept vacancy rates minimal. Management anticipates occupancy to remain robust, exceeding 98% through 2024, underscoring Realty Income’s disciplined approach and commitment to portfolio quality — a crucial factor in maintaining consistent revenues.
Balance Sheet Strength, Dividend Payout Encouraging for O
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Realty Income’s solid financial position and commitment to dividend growth highlight its shareholder appeal. Known as “The Monthly Dividend Company,” it has achieved 23 dividend hikes over the past five years, supported by a strong balance sheet and an A- credit rating. With ample liquidity, a well-laddered debt structure and reliable cash flows, Realty Income is well-positioned to continue rewarding shareholders with sustainable, growing dividends.
O Stock Valuation Looks Attractive
Realty Income shares currently offer an appealing valuation opportunity. The stock is trading at a forward 12-month price-to-FFO of 13.96X, below the retail REIT industry average of 16.51X and its five-year median of 16.72X. This discount provides an attractive entry point, with room for investors to benefit as the market potentially revalues the company’s growth and earnings potential.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Final Thoughts on O
A thorough discussion points out that Realty Income’s core business is thriving, and a favorable investment climate is encouraging it to pursue an ambitious investment strategy while maintaining highly sustainable dividend payouts. With a strong balance sheet and abundant liquidity, Realty Income is well-positioned to invest more aggressively as market conditions improve.
Also, the valuation still looks cheap. All these indicate that assuming an increasing position in this Zacks Rank #2 (Buy) stock will be a prudent decision before the price moves significantly away from its current level. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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.
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O Stock Falls 6.9% From Its 52-Week High: Should You Buy the Dip?
After reaching a 52-week high last week, shares of Realty Income (O - Free Report) are trading 6.9% lower, closing at $60.41 yesterday on the NYSE. While it marks a 12.7% increase in the past six months, the stock has underperformed the Zacks REIT and Equity Trust - Retail industry’s growth of 19.5% and the S&P 500 composite’s rise of 16% over the same time frame.
Before the recent decline, this leader in the net lease sector had witnessed a decent surge in the stock price, thanks to the September rate cut and indications of a probable reduction in rates in the upcoming period. However, of late, volatility has been creeping into the market ahead of the U.S. Presidential Election, the Fed’s FOMC meeting and geopolitical conflicts in the Middle East. Treasury yields have continued the ascent. The market is brooding about what the Central Bank’s stance will be on rates and is concerned about the tone of the post-FOMC meeting statement by Fed Chairman Jerome Powell in November.
Nevertheless, Realty Income has inherent strength, with its portfolio comprising a significant portion of top industries selling essential goods and services. It derives a majority of its annualized contractual rents from tenants with a service, non-discretionary, low-price-point component to their business, assuring stable revenue generation. The company’s accretive buyouts and diversification, backed by a healthy balance sheet, bode well for long-term growth.
Six-Month Price Performance
Image Source: Zacks Investment Research
Let’s understand these factors in detail to better analyze how to play the stock after the price decline.
Resilient Business Model, Expansionary Efforts to Drive O
Realty Income has achieved substantial growth and diversification, transitioning from a net lease participant to a dominant REIT with a varied portfolio across industries and geographies. Over the past decade, the company strategically diversified beyond retail into single-tenant industrial properties, responding to the rise of e-commerce and omnichannel strategies. This evolution has strengthened its market positioning and reduced dependence on any single asset class.
The company’s international expansion, especially in Europe, adds another layer of growth potential. It gained a foothold in the United Kingdom with long-term net lease agreements with Sainsbury’s grocery chain in 2019 and recently opted for a sale-leaseback transaction for 82 retail properties leased to affiliates of Decathlon in recent times. The investment climate in Europe remains favorable, presenting opportunities for continued growth abroad and enhancing Realty Income’s global footprint.
Further diversification into non-traditional assets, like gaming and data centers, has bolstered Realty Income’s portfolio. Investments in high-profile properties, such as the Encore Boston Harbor and Bellagio Las Vegas, plus a joint venture with Digital Realty (DLR - Free Report) for data centers in Northern Virginia, add valuable diversity. The January 2024 merger with Spirit Realty Capital also increased its scale, strengthening Realty Income’s industry positioning.
Image Source: Realty Income Corporation
Realty Income’s resilient portfolio is spread across tenant types, industries and geographies, mitigating risks associated with any one sector. With properties in all 50 U.S. states, the U.K. and six other countries in Europe, the company also leases to stable industries, including grocery, convenience and dollar stores, which are less vulnerable to economic downturns and online competition. Its tenant roster comprises names like Dollar General Corporation (DG - Free Report) and Dollar Tree, Inc. (DLTR - Free Report) , among others. As of mid-2024, 36% of rental income is sourced from investment-grade tenants, enhancing cash flow stability.
Image Source: Realty Income Corporation
Operating with a high occupancy rate of 98.8% as of June 30, 2024, Realty Income’s high-quality real estate assets and prudent acquisitions have kept vacancy rates minimal. Management anticipates occupancy to remain robust, exceeding 98% through 2024, underscoring Realty Income’s disciplined approach and commitment to portfolio quality — a crucial factor in maintaining consistent revenues.
Image Source: Zacks Investment Research
Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Balance Sheet Strength, Dividend Payout Encouraging for O
Solid dividend payouts are arguably the biggest enticements for REIT shareholders, and Realty Income’s solid financial position and commitment to dividend growth highlight its shareholder appeal. Known as “The Monthly Dividend Company,” it has achieved 23 dividend hikes over the past five years, supported by a strong balance sheet and an A- credit rating. With ample liquidity, a well-laddered debt structure and reliable cash flows, Realty Income is well-positioned to continue rewarding shareholders with sustainable, growing dividends.
O Stock Valuation Looks Attractive
Realty Income shares currently offer an appealing valuation opportunity. The stock is trading at a forward 12-month price-to-FFO of 13.96X, below the retail REIT industry average of 16.51X and its five-year median of 16.72X. This discount provides an attractive entry point, with room for investors to benefit as the market potentially revalues the company’s growth and earnings potential.
Forward 12 Month Price-to-FFO (P/FFO) Ratio
Image Source: Zacks Investment Research
Final Thoughts on O
A thorough discussion points out that Realty Income’s core business is thriving, and a favorable investment climate is encouraging it to pursue an ambitious investment strategy while maintaining highly sustainable dividend payouts. With a strong balance sheet and abundant liquidity, Realty Income is well-positioned to invest more aggressively as market conditions improve.
Also, the valuation still looks cheap. All these indicate that assuming an increasing position in this Zacks Rank #2 (Buy) stock will be a prudent decision before the price moves significantly away from its current level. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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.