Realty Income Offers Income Reality

With shares of Realty Income Corp. (NYSE:O) trading at around $43.16, is the company an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

There are so many places to begin with this story. However, instead of getting into too much detail, we’re going to keep it simple. If you’re long Realty Income, then you already know the specifics. This article will be more geared toward people who might want to investigate further.

Realty Income is arguably one of the top REITs in existence. This is a company that has increased its dividend 19 years in a row. After closing the merger with American Realty Capital Trust (NASDAQ:ARCT), Realty Income intends to increase its dividend by $0.35 per share. As you can see, the dividend is safe. Currently, Realty Income yields 4.50 percent. Dividends are paid monthly opposed to quarterly, which investors love. The company has become known as “The Monthly Dividend Company.”

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Realty Income owns 2,800 properties, the majority of which are leased out for 15 to 20 years. Most leases are given to retail chain stores. The majority of the income earned from these leases is then paid out to shareholders.

Let’s take a look at some other important numbers.

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Realty Income is normal. Actually, while it might be a little high compared to the average company, it’s strong for the industry. The companies listed below are within the same range, but it’s easy to find REITs with very weak debt-to-equity ratios. The balance sheet could use some help, but cash flow is decent. Operating cash flow is currently over $308 million.

Debt-To-Equity

Cash

Long-Term Debt

O

1.02

$2.79 Million

$2.49 Billion

FRT

1.10

$147.68 Million

$1.15 Billion

ARCT

0.93

$8.59 Million

$202.31 Million

 

T = Technicals on the Stock Chart Are Strong

It’s nice when you own a stock that gains over 26 percent in one year. It’s even better when you’re receiving healthy dividend payments on a monthly basis. Furthermore, Realty Income has outperformed Federal Realty Investment Trust (NYSE:FRT) and American Realty Capital Trust over the past three years.

1 Month

Year-To-Date

1 Year

3 Year

O

7.46%

7.46%

26.71%

82.22%

FRT

3.37%

2.04%

21.07%

73.94%

ARCT

8.74%

10.53%

0.79%

0.79%

 

At $43.16, Realty Income is currently trading above all its averages.

50-Day SMA

40.04

100-Day SMA

40.79

200-Day SMA

40.31

 

E = Earnings and Revenue Have Been Steady

When we look at earnings, we see a steady range. Revenue has been improving since 2009.

2007

2008

2009

2010

2011

Revenue ($)in millions

291.48

325.04

322.55

343.49

421.06

Diluted EPS ($)

1.16

1.06

1.03

1.01

1.05

 

When we look at last quarter on a YoY basis, we see a moderate increase in revenue and a moderate decrease in earnings. The latter shouldn’t be a concern.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

106.23

115.92

114.72

115.64

120.42

Diluted EPS ($)

0.27

0.27

0.20

0.25

0.20

T = Trends Support the Industry

Nothing could have been more unpopular than REITs during the financial crisis of 2008/2009. However, just like so many crises, this led to a buying opportunity. The industry has been improving along with the rest of the economy since that time. The question now is whether or not the recovery is sustainable without government stimulus. Time will tell.

Conclusion

REITs are tempting, but they can be dangerous as well. However, Realty Income is one of the safest REITs you will find. The yield might not be as high as many other popular REITs, but that’s also what makes Realty Income a safer option. This is a company that knows its bounds, and it will reward investors exceeding its long-term capabilities.

Realty Income is an OUTPERFORM.

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