After a slump caused by the shutdowns and stay-ins of the coronavirus pandemic, the retail sector is coming back. As it does, bellwether retail real estate investment trust (REIT) Realty Income (O -0.96%) is riding alongside it. The company's stock has generally appreciated over the past year or so, to the point where it's only a few dollars short of its five-year high.
That's a very lofty perch. Despite its many advantages as a company, Realty Income's stock is not cheap. Let's take a closer look at the state of the company to see if it's still worth buying at this relatively pricey level.
The reality of Realty
As clever businesses do, Realty Income took advantage of a down period to do some shopping. It struck a deal to acquire retail REIT peer Vereit in the coronavirus-plagued month of April 2021, in a transaction with an enterprise value of roughly $50 billion. The deal closed last November.
At a stroke, it made the already sizable Realty Income a titanic retail REIT. Vereit's properties in its portfolio gave it a total of over 11,000 pieces of real estate, located in every U.S. state and abroad in Spain and the U.K.
Realty Income's client list includes some of the top names in chain stores, and it's quite diverse in terms of retail segments.
For example The Dollar General and Dollar Tree/Family Dollar discount store tag team is one of the major clients, with a combined (and dizzying) 2,288 leases with the REIT as of Dec. 31, 2021. CVS, with 183 leases, is also a frequent flyer, as is AMC Entertainment with 35 cinemas in Realty Income facilities. Ditto for FedEx and its 80 leases.
One notable element of all these businesses is their resistance to the retail apocalypse -- the dreaded, and somewhat mythological, end of brick-and-mortar shopping due to the rise of e-commerce. While there is some justification for this fear, Realty Income's portfolio is nicely defensive in that respect.
Yes, some aspects of these businesses can be transacted online -- we can always watch movies streamed at home, for instance. But these companies offer either experiences that are substantially different and better when done in person (like movie watching or dining out) or are more convenient/attractive (picking up a prescription as soon as you need it from a CVS).
So with that absorption of Vereit behind it and a nice retail recovery tailwind at its back, Realty Income has done extremely well lately. Across the entirety of 2021 revenue shot 26% higher on a year-over-year basis. Meanwhile, advancing at a similar rate was the company's adjusted funds from operations (AFFO, a standard profitability metric for REITs, in this case tweaked to exclude one-offs and the costs of the Vereit deal).
Doling out a dependable dividend
That substantial improvement in the fundamentals gives Realty Income plenty of room to do one of the things it really enjoys -- raising its dividend. The company's unusual policy of handing out a distribution every month (as opposed to the standard quarterly) provides the scope to adjust the dividend policy quickly if need be.
Since mid-2021, when we all became hopeful the worst of the coronavirus pandemic was behind us, Realty Income has declared four bumps to the dividend. Now these aren't exactly monster raises -- the biggest one was a princely $0.01, to just under $0.25 per share -- but they've really added up over time. If we zoom out and look at the last ten years, Realty Income's payout has risen by nearly 70%.
In recent months, it's likely the stock price appreciation was a factor in the series of bumps, as the company benefits from keeping its dividend yield competitive with peers. The result is that, while its yield isn't a standout, it's substantial enough and broadly in line with the equity REIT sector as a whole, at 4.2%.
A fine play on retail's future
I feel the retail sector's recovery still has a good runway, since there are some consumers who are still hesitant to go out while the coronavirus remains somewhat of a threat. The global economy continues to motor along, meaning that many of those folks have dosh to spend whenever they start popping around to stores again.
And if the retail sector as a whole benefits, you can be darn sure Realty Income will be one of its top beneficiaries. I don't worry at all about the future of this company, and I think it's a solid operator and a solid stock to own.