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Realty Income Stock Analysis

Realty Income Corporation (O) engages in the acquisition and ownership of commercial retail real estate properties in the United States. The company owns 2634 properties, located in 49 states, which are occupied in 136 retail and other consumer businesses in 38 different industries. Realty Income is a dividend achiever, which has increased distributions several times per year since going public in 1994. The company is one of the few which The company is in the business of acquiring triple-net lease properties from owners, and then leasing them back using long-term lease contracts. As a Real Estate Investment trust, the company has to distribute almost all of its net income to shareholders. An important metric for evaluating REITs is Funds from operations (FFO), which stood at $1.98/share in 2011. Realty Income distributed $1.746 /share in 2011.

FFO is defined as net income available to common stockholders, plus depreciation and amortization of real estate assets, reduced by gains on sales of investment properties and extraordinary items. Once the company’s FFO payout ratio decreases, it should be able to generate higher dividend growth to shareholders.
Over the past decade, dividends have increased by 4.30%/year. Dividend growth has been limited over the past five years, due to the high payout ratio.

Currently, I find Realty Income shares to be priced above my buy range. I would consider adding to my position in the company on dips below $35, which is equivalent to a 5% yield. A 6% yield would correspond to a drop in the price all the way to $29.20 /share.

Full Disclosure: Long O and DEO

Relevant Articles:

Four High Yield REITs for current income
Realty Income (O) Dividend Stock Analysis
Dividend Achievers Offer Income Growth and Capital Appreciation
Diageo (DEO) Dividend Stock Analysis 2011

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