Realty Income (O -2.47%) and Intuitive Surgical (ISRG -0.30%) are two companies that offer dependable returns backed up by their consistent growth. These businesses, though vastly different, offer great long-term opportunities for investors. Neither stock is inexpensive, but their high valuations reflect the confidence investors have in the companies' expected sales in the coming years.
Their business models appear to be relatively recession-proof. While Realty Income's tenants are primarily in retail, for the most part, they operate in businesses that are not threatened by the rise in online sales. Intuitive Surgical is an industry leader in robotic surgery, which, because of its increased safety and ability to cut costs, is expected to increase. Many of the procedures done by Intuitive Surgical's robotic systems can't be put off, even during a recession, such as heart bypass surgeries or prostate cancer surgeries.
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Realty Income's reliability offers multiple rewards
Realty Income is well known to dividend investors because it pays out a dividend monthly rather than a quarterly one. There's a lot more to what makes the real estate investment trust (REIT) a monster stock: consistent dividend increases, steady growth in adjusted funds from operation (AFFO), and reliable share price growth.
The stock's price is up more than 12% this year, and over the past 10 years, it has delivered a total return of 205%. The monthly dividend is $0.2465 per share, giving it a yield at current prices of 4.24%. It has increased its dividend for 97 consecutive quarters.
Realty Income released its 2021 year-end report on Feb. 22 and reported $3.59 in AFFO per share, up 5.9% over 2020. Over the past decade, the company has grown AFFO per share by 74.3%. With REITs, AFFO is a more predictable indicator of performance than the traditional earnings per share (EPS) metric because it eliminates the negative effect of depreciation on real estate investments that are more likely to gain in value. I also used adjusted AFFO rather than simply FFO because AFFO takes into account the capital expenditures that are typically needed to maintain properties.
The dividend is rather safe because Realty Income sticks with long-term leases (with an average of nine years left on its leases) to well-known retailers like Walgreens Boots Alliance (WBA -1.26%), Dollar General (DG -0.74%), and Dollar Tree (DLTR -0.81%), and not one of its tenants is responsible for more than 4.1% of its portfolio of 11,136 properties.
In the fourth quarter, Realty Income collected 99.5% of its rents, and its properties were 98.5% occupied. The company's AFFO payout ratio in 2021 was 78.5%, slightly higher than the industrial REIT industry average of 76.1% in the third quarter, but considering the quality of the company's clients and the long-term leases of Realty Income, its payouts are still safe.
Intuitive Surgical keeps building on its base
Intuitive Surgical leads the industry in sales of robotic-assisted surgery machines and their peripherals. Intuitive's shares are down more than 18% year to date, but up more than 18% over the past 12 months and its total return is more than 425% over the past 10 years, outdistancing the S&P 500 average of 370% over that time.
The company is a monster stock because of its consistent revenue growth. Apart from 2020, when the pandemic led to fewer elective procedures that require Intuitive Surgical's systems, the company has increased revenue every year since 2014. Over the past 10 years, it has grown annual revenue by 162%.
Last year, Intuitive reported $5.7 billion in revenue, up 31% over 2020, with annual earnings per share (EPS) of $4.66 in 2021, compared to $3.02 in 2020. In the fourth quarter, it reported $1.55 billion in revenue, up 17% year over year, and the company said it grew its da Vinci Surgical System installed base to 6,730 systems last year, up 12% over 2020. Keeping in mind the pandemic still had a big negative impact on elective procedures last year, it's easy to see how the company is set up for an even larger jump this year.
The number of installed systems is crucial to Intuitive's business because it makes more money from the regular updating of instruments, accessories, and other services from its robotic systems than it does selling the actual systems. For example, in the fourth quarter, the company made $469.9 million from the 385 da Vinci systems it sold, and $1.08 billion in revenue from instruments, accessories, and services for its systems.
The healthcare company has significant tailwinds that make it a good long-term choice. As a pioneer in robotic surgery, it has a market edge that is reinforced by the high switching expense of robotic systems, which can cost as much as $2.6 million, not counting the consumables that go with them and the training costs of using them.
On top of that, there is plenty of growth expected in the industry. A report by Mordor Intelligence values the global market for surgical robotics at $4.43 billion in 2020, rising to $9.59 billion by 2026, giving it a compound annual growth rate of 11.4% over that period.
ISRG All Time Total Returns (Daily) data by YCharts
Good time to pounce
The markets have been volatile to start this year, but that could work out in investors' favor. Right now, you can take advantage of the a momentary a dip in their prices to gobble up shares. Of the two, I think there's more long-term growth potential for Intuitive Surgical, though both stocks are solid choices if you're looking for strong long-term returns with rewarding dividends.
