Potentially, 2025 Marks a Promising Year for Realty Income's Stock Investments
Potentially, 2025 Marks a Promising Year for Realty Income's Stock Investments
Realty Income (O 1.29%) has become a complex puzzle in the market recently. Despite expanding its operations as a real estate investment trust (REIT), its stock has plummeted by about a third from its peak in February 2020, due to elevated interest rates diminishing its earnings.
However, the REIT has persisted in acquiring properties and securing tenants despite the interest rate surge, proving the robustness of its business. With the Federal Reserve reducing interest rates, there's a strong possibility of a long-overdue stock recovery.
The current state of Realty Income stock
Realty Income has flourished by leasing single-tenant commercial properties on a net basis. This arrangement shifts the responsibilities for taxes, insurance, and maintenance to the tenants, potentially increasing the REIT's profits.
As a REIT, it is duty-bound to disburse at least 90% of its taxable income as dividends annually. The REIT structure and this rule exempt companies like Realty Income from paying corporate income taxes on the revenues they distribute. Realty Income has distinguished itself in this regard, positioning itself as "The Monthly Dividend Company." It pays out dividends monthly instead of the more common quarterly distribution schedule and has boosted its payouts at least once annually since 1994.
Despite experiencing difficulties, the business has continued to acquire and develop properties -- including the portfolio of more than 2,000 properties it obtained after purchasing Spirit Realty Capital in January. This further confirms that higher interest rates have not curtailed the company's growth.
Financial performance of Realty Income
Predictably, the Spirit Realty acquisition was the primary driver of Realty Income's growth during the past year. In the first nine months of 2024, its revenue rose by 31% to $3.9 billion.
Even considering merger and impairment costs, its net income was nearly $666 million in the first three quarters of 2024 and grew only slightly yearly. Nevertheless, its funds from operations (FFO) -- a metric commonly employed by REITs to offer a clearer picture of their free cash flow and operational performance -- increased by 27% year over year to $2.7 billion.
Analysts predict 6% revenue growth for Realty Income in 2025, which is more in line with its historical averages. As a result, investors seem to have largely disregarded its 2024 revenue and earnings growth, and despite some fluctuations, the stock has declined by a few percentage points over the past year.
However, the management has boosted the monthly dividend five times over the previous 12 months. Shareholders now receive $3.17 per share in annual payouts. Given the current share price, this equates to a yield of 5.7%, over 4.5 times the S&P 500's average dividend yield of 1.2%.
When considering its P/E ratio of 53, the stock may seem overpriced. However, investors should remember that a REIT's net income includes significant non-cash expenses such as depreciation and impairment. These reduce the net income and, consequently, inflate the earnings multiple.
This is why the preferred measure of a REIT's valuation is the price-to-FFO ratio. Realty Income stock trades at a ratio of 14. This low ratio suggests that the stock is underpriced, especially considering that falling interest rates will likely boost its profits in the short term.
Is 2025 likely to be a profitable year for Realty Income stock?
Though uncertainty lingers for 2025, Realty Income stock has a strong potential to gain traction over the next year.
Despite its challenges, the lowering interest rates will present investors with a new reason to consider this stock. They will likely recognize a company with a high dividend yield and a reasonable valuation when assessed against its FFO.
Additionally, its nearly 99% occupancy rate and continuous expansion of its property portfolio demonstrate the company's stability. Therefore, shareholders can anticipate profits from a high-yielding dividend and possible significant price growth as more investors acknowledge Realty Income's attractive value proposition.
- Given the Federal Reserve's decision to reduce interest rates, investors might see investing in Realty Income as an opportunity due to its high dividend yield and potential for price growth, considering its reasonable valuation when assessed against its funds from operations (FFO).
- In light of the lower interest rates, financial experts might suggest exploring investment options in Realty Income, as its stock could become more attractive due to its high dividend yield, reasonable price-to-FFO ratio, and continuous expansion of its property portfolio, which currently boasts an almost 99% occupancy rate.