It's a tough time to be in the retail business. These days, nearly all the growth in retail sales is coming from online retailers such as Amazon.com (NASDAQ:AMZN). Even Amazon's push into brick-and-mortar grocery stores with its purchase of Whole Foods is seen as a harbinger of further consolidation in the industry .
With that background, there's no wonder the market is worried about Kimco Realty (NYSE:KIM), a real estate investment trust with a heavy concentration of grocery stores. Fully 75% of Kimco Realty's base rent comes from real estate anchored by grocery retailers. In an era where even grocery trips are under assault from online competition, it's only fair that the market is questioning whether there's value left in the bricks and mortar that make up those stores.
There's still a need for these facilities
Despite the ever tighter integration of online and physical retail, there's still a need for grocery stores. The logistics costs of shipping perishable, temperature-sensitive foods make centralized distribution to stores far more affordable than shipping those products directly to people's homes. So even if some grocery trips can be replaced with online purchases, physical grocery stores aren't quite an endangered species.
Where there's a demand for a company's services, there's value in the services the company provides. Kimco Realty's shares are well off their all-time highs, driven by the new reality of merged online and physical retail. Still, that decline in price looks as if it fairly reflects the current reality, making Kimco Realty appear reasonably priced for its current prospects. A reasonable price combined with a hefty dividend yield makes Kimco Realty worthy of consideration for income-oriented investors.
What Kimco Realty has going for it
Thanks to the market's punishment of its shares, Kimco Realty's shares currently trade at around 11 times its funds from operations, an important measure of cash flows in real estate-oriented businesses. That indicates that there are substantial cash flows backing its current stock price. In addition, analysts are expecting growth in the neighborhood of 4.6% annualized over the next five or so years. While that's a modest growth rate, it does point toward continuing demand for its real estate.
In addition, investors receive a dividend yield of around 6.4% on the money they have tied up in Kimco Realty's shares. That yield is comfortably covered by the company's funds from operations, representing around 72% of that cash flow measure. The dividend has regularly increased since we emerged from the financial crisis, and there's room for it to keep modestly increasing as long as its operations continue to increase their cash flows.
From a balance-sheet perspective, like most real estate companies, Kimco Realty does carry debt, but when looked at through the lens of its total asset base, that debt load looks reasonable. The company's debt-to-equity ratio is below 1, and its current ratio above 3.8 indicates that it has sufficient financial flexibility to cover the bills coming due in the near term.
Rising interest rates do represent something of a risk for the company, as its interest expenses have increased by $3.8 million in the first half of 2018 from 2017, because of higher rates. Still, its next major maturity date of low fixed-rate debt looks to be in 2021 , giving it ample time to prepare.
So is Kimco Realty worth buying?
Based on a discounted cash flow model, Kimco Realty should be fairly valued at around $18.61. At a recent market price around $17.47, it is trading at a slight discount to that fair-value estimate. Put that reasonable valuation together with its decent balance sheet and comfortable dividend, and Kimco Realty looks like a stock worthy of consideration for income-oriented investors.
As with any investment, there's risk in owning its shares. For example, if Amazon.com solves the "last mile" delivery problem for perishable, temperature-sensitive groceries, Kimco Realty's long-term sustainability could be put in question. If interest rates skyrocket, or if we have another financial crisis at exactly the wrong time, its debt coverage costs could become impossibly high.
Still, at its prices today, Kimco Realty appears to be reasonably compensating investors for the risks they're taking by owning its stock.
Chuck Saletta owns shares of Kimco Realty and has the following options: short January 2019 $17.50 puts on Kimco Realty, long January 2019 $17.50 calls on Kimco Realty, and short October 2018 $17.50 calls on Kimco Realty. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.