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Realty Income Stock Analysis

Company: Realty Income Corporation

Ticker: O Previous Close: $61.74 (2/9) Industry: REIT (Retail)

Short-term: Buy

Middle-term: Buy

Long-term: Buy


Economic Moat

Free Cashflow

Realty Income (O):

Free cashflow: $1,122,126,000

Revenue ( = Sales): $1,551,567,000

Free Cashflow/Revenue (>5%) = 72.32%➤This is a great percentage which also means that the company can ensure a more secure dividend. It should be noted that that such high free cashflow ratios are often the case with many REIT‘s; however, Realty Income’s free cashflows are (and have been in the past) really strong.

Net Margins (> 15%)

Realty Income (O):

Net Income (Consolidated) : $436,482,000

Revenue : $1,551,567,000

Net Margin = Net Income/Revenue = 28.13% ➤ This is also a very good percentage and can even be seen as an added bonus with Realty Income as this percentage becomes even better when using FFO. Funds From Operations (FFO) are typically used because they are a better measurement of net income for a REIT due to the way they must report costs. The effect of this will primarily be seen in the next point.

ROE (> 15%)

Realty Income (O):

Return on Equity (ROE)= Net Income/Shareholder's Equity

ROE = 4.12%➤ This is not a very high percentage, but it can be attributed to the way that the firm has to record earnings as a REIT. Additionally, this percentage is around the industry average of between 3.9% and 5%. When using FFO, this percentage then rises to 12.76% which is even better given the current situation with COVID-19 i.e. (less rent is paid overall and net margins are decreased companywide).

ROA (> 6%)

Realty Income (O):

Return on Assets (ROA)= Net Income/Assets

ROA = 2.71% ➤ This percentage is not very good, but again, this metric must be considered according to the context of the way Realty Income is structured as a firm and how they have to record earnings as a REIT. When using FFO, this percentage increases once more to 6.72% which is actually fairly good.

Economic Moat Conclusion

Realty Income (O): Altogether, this company has very good free cashflows and net margins which help to ensure an excellent, secure dividend and a strong position which are important factors when choosing a REIT stock for one's portfolio. This firm has quite a low ROE and a ROA, but this is mainly due to the way they have to report earnings and are structured as a REIT. When using FFO as the metric to gauge company value instead of earnings, these variables are actually good. Having analyzed each of these factors and considered them for their worth, it can be concluded that Realty Income indeed has an economic moat which means they are currently well protected against setbacks and competition.


Realty Income:

To calculate this metric the firm's current free cashflow of $1,122,126,000 will be used. In the past, Realty Income's cashflows had a good, steady upward trend. This factor makes it easier to predict growth rates. Based on those past figures and properly weighting the most recent ones, the firm can be assumed to have an average yearly growth of 9% in the first five years and 7% after that. Because of their strong economic moat, it can also be assumed that the company has a discount rate of 8%. Combining each of these variables together, a per-share price of $91.67 is the result.

Current Price: $61.74

Estimated Fair Value Price: $91.67 ➤ 33.26% Margin of Safety. This percentage and overall margin of safety is great for a company with such strong cashflows.

20 Point Analysis

1. CEO

Realty Income: Sumit Roy has been CEO since 2018 and he has been with Realty Income since 2013. This isn’t as long as other CEOs in the industry or even in general, but in his defense, the company has done well during his tenure at the helm of the firm. Last year it was reported that he approximately earned $7.5 million dollars which isn’t overly high and still within acceptable levels in my opinion. Of course, this is rather subjective and up to debate.

2. Is the company innovative?

Realty Income: They are not quite as innovative as other firms but that is not their goal. Realty Income primarily focuses on growing steadily over time whilst providing their shareholders with consistent dividends. Per this, the company continues to excel and has excelled in the past, in focusing on this goal. This efficiency and excellence to that end results in Realty Income being highly regarded as a superb, monthly dividend-paying company.

3. Can the company grow?

Realty Income: Their business model and the specific industry that they are in certainly allows them to grow as long as they stay ahead of the competition. They mainly invest in retail properties which will most likely remain needed in the coming decades and well into the future. Small and big businesses alike will continue to need space, which will further push growth in the positive, upward direction. A part of Realty Income's free cashflows are distributed each month as previously reported, but that doesn’t mean there isn’t any cash left afterward. The remaining cash is used by the firm for continuing their growth so that they can ensure the consistency of their dividend rates and payouts.