Last update on 2024-06-27

Realty Income (O) - Dividend Analysis (Final Score: 4/8)

In-depth dividend analysis of Realty Income (O) - Final Score 4/8. Comprehensive assessment of stability, coverage by earnings, and cash flow over 20 years.

Short Analysis - Dividend Score: 4

We're running Realty Income (O) against the 8-criteria scoring system to evaluate the performance and stability of a company's dividend policy.

Realty Income's dividend policy shows mixed results. With a high dividend yield of 5.33%, it provides strong income returns compared to the industry average. However, the average annual growth rate of its dividends over the past 20 years is slightly below the desired 5% threshold, showing inconsistency. The average payout ratio of 172.28% is concerning as it's much higher than the ideal 65%, indicating the company pays out more than it earns. Dividends are not well covered by earnings, posing risks to sustainability. However, dividends are fairly covered by cash flow, though this requires close monitoring. Positive aspects include Realty Income's stable and uninterrupted dividend payments for over 25 years, not reducing dividends by more than 20% yearly. Yet, the lack of share repurchases is a downside, resulting in stock dilution.

Insights for Value Investors Seeking Stable Income

Based on the analysis, Realty Income has strengths in dividend stability and coverage by cash flow. However, the high payout ratio and dividend growth inconsistency point to potential risks. Income investors might find the high yield appealing, but it's crucial to consider these risks. It could be worth further investigation, especially evaluating management's ability to sustain payouts without compromising financial health. Proceed with caution and keep an eye on earnings coverage and policy changes.

For those who are interested in delving deeper into the specifics, the subsequent section provides a comprehensive exploration of the criteria.

Dividend Yield Higher than the Industry Average?

Dividend yield is a key metric for evaluating a company's return on investment for shareholders through its dividend payouts.

Realty Income’s current dividend yield stands at 5.3326%, which is notably higher than the industry average of 4.15%. Over the last 20 years, Realty Income has consistently maintained a relatively high dividend yield compared to the industry average, except for some fluctuations during specific years such as in 2016 and 2020. In 2008, Realty Income's yield peaked at 7.2009% compared to the industry's 9.19%, displaying resilience during the financial crisis. A higher dividend yield is often attractive to income-focused investors, especially during periods of low-interest rates. However, the consistency of maintaining such a high yield over time underlines the company's strong ability to generate steady cash flows and distribute dividends. Given these trends, Realty Income's higher dividend yield can be viewed as favorable, offering superior income returns to its shareholders relative to industry norms.

Average annual Growth Rate higher than 5% in the last 20 years?

The Dividend Growth Rate (DGR) measures the annualized percentage growth of a company's dividend over a specified period, typically five or more years. It is important to consider because a consistently high DGR indicates a company's ability to generate increasing returns for its investors, which signifies financial health and effective management.

Upon examining Realty Income's dividend per share (DPS) ratios from 2003 to 2023, it becomes evident that the Dividend Growth Rate (DGR) fluctuates significantly over the years. Positives include remarkable growth rates in 2004 (129%) and 2006 (22%). However, it also shows negative growth in several years, such as 2014 (-22%) and 2021 (-50%). The average dividend ratio over these years is approximately 4.97%, which falls short of the desired 5% threshold. This volatile pattern does not paint a consistently positive picture. However, the overall growth trend still leans toward upward progression, albeit not strongly robust. This trend is somewhat concerning and suggests that while there has been growth, it has been inconsistent, indicating variable financial performance and potential risks for future dividend stability.

Average annual Payout Ratio lower than 65% in the last 20 years?

The Dividend Payout Ratio indicates the proportion of earnings a company pays to its shareholders in the form of dividends. A ratio lower than 65% is considered healthy, showing the company retains enough earnings to reinvest and grow. Consistent high dividends payout can be risky.

Realty Income's average payout ratio over the last 20 years is approximately 172.28%, which is significantly higher than the recommended threshold of 65%. This high payout ratio signifies that the company is paying out more than it earns, which could indicate a risk to the sustainability of its dividends. Over the years, the payout ratio has fluctuated, reaching as high as 328.34% in 2021, which is particularly concerning. Although the company is known for its consistent dividend payments, the excessively high payout ratios could eventually put pressure on its financial health, especially during economic downturns. This trend is generally unfavorable as it implies potential risks in affording future dividend payouts and limited ability to reinvest in the business.

Dividends Well Covered by Earnings?

Dividends being well covered by earnings indicates that the company generates sufficient profit to sustain its dividend payments, ensuring financial stability and reducing the risk of dividend cuts.

Examining the provided data for Realty Income (O), we observe that earnings per share (EPS) have generally fluctuated between $1.1454 and $1.4211 in recent years, with a notable drop to $0.8671 in 2020. On the other hand, the dividend per share has steadily increased from $1.1815 in 2003 to $3.062 in 2023. The ratio of dividends covered by earnings per share has showcased a mixed trend, progressively increasing, suggesting that the company's earnings are insufficient to cover dividends. It peaked at a concerning level of 3.283 in 2021 and showed a slight improvement until 2023. This indicates that the dividends are not well covered by earnings over the period, which could signal potential vulnerabilities in the dividend sustainability of Realty Income. The deteriorating coverage ratio might pose risks for dividend cuts in the future unless the company boosts its earnings.

Dividends Well Covered by Cash Flow?

Dividends well covered by cash flow signify the company's ability to sustain its dividend payouts from its free cash flow, ensuring financial health and minimizing external borrowing.

From the data provided, there is a noticeable trend in how Realty Income's dividends are covered by its free cash flow. Over the most recent years, 2021 to 2023, the ratio indicates a slight downward trend from 0.884 to 0.714, suggesting that dividends are consuming a significant portion of the free cash flow. However, historically, there was a noticeable improvement from 2008, the year of the financial crisis, to the 2020, with ratios consistently around 0.8 to 0.9, showing steady coverage. The negative coverage years in the early 2000s indicate poor cash flow levels relative to dividends, but this trend did correct. Despite the ratios dropping below 1, the recent levels do not necessarily indicate poor management, but caution is advised as the lower ratios may hint at potential strain in future payouts. Overall, the trend is stable, but vigilance is necessary to ensure coverage does not deteriorate further.

Stable Dividends Since the Company Began Paying Dividends?

Stable Dividends Over the Past 20 Years evaluates if a company has decreased its dividend per share by more than 20% in any year during this period, this indicates a company has a consistent dividend policy, essential for income investors.

Looking at the dividend per share from 2003 to 2023, we can observe a steady increase in the dividends Realty Income (O) has paid out annually. Starting from $1.1815 in 2003, the dividend per share has progressively increased to $3.062 by 2023. Notably, even in challenging economic periods, like during the financial crisis of 2008 or the recent COVID-19 pandemic, Realty Income continued to raise its dividends. The analysis confirms that there hasn't been a drop by more than 20% in any of the years within this timeframe. This is a positive trend, demonstrating resilience and a commitment to rewarding shareholders, which is crucial for income-seeking investors. It cultivates trust and reliability, key characteristics that contribute to Realty Income's reputation as a 'monthly dividend company'.

Dividends Paid for Over 25 Years?

Criterion 6: Dividends Paid for Over 25 Years. This criterion examines whether a company has been consistently paying dividends for a period exceeding 25 years, demonstrating resilience, stability, and long-term shareholder value creation. A company's ability to sustain dividend payments over such an extended period reassures investors of its financial health and commitment to returning value to shareholders.

Given the data provided for Realty Income (O), the company has consistently paid dividends from 1998 to 2023, amounting to a span of 26 years. This trend not only meets but exceeds the criterion for paying dividends for over 25 years. During this period, we can observe a general upward trajectory in the dividend per share, which increased from $1.1501 in 1998 to $3.062 in 2023. This steady increase signifies that Realty Income has reliably enhanced shareholder value over the long term. For example, in 2007, the dividend per share was $1.57, and it increased incrementally, reaching $2.971 by 2021 and ultimately $3.062 in 2023. Notably, despite economic upheavals such as the 2008 financial crisis and the COVID-19 pandemic starting in 2020, the company maintained and even increased dividend payments. This evidences the robustness of Realty Income's financial structure and its unwavering prioritization of shareholder returns. Therefore, we trend this positively for both resilience and growth.

Reliable Stock Repurchases Over the Past 20 Years?

reliable stock repurchases over the past 20 years and why it is important to consider

The number of shares for the past 20 years for Realty Income (O) has steadily increased from 71,222,628 in 2003 to 692,298,000 in 2023, showing an upward trend with no years of repurchase. This trend indicates a significant dilution over the period. Realty Income has not repurchased any shares in the past 20 years, and the average number of shares has grown at a rate of approximately 12.63 million shares per year. This negative trend is important as it affects earnings per share (EPS) and can lead to the dilution of shareholders' value.