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Is Realty Income's (O) 109th Monthly Dividend Hike Sustainable?

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Zacks Equity Research
·4 min read
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Realty Income Corporation O recently announced the 109th common stock monthly dividend hike since the company’s NYSE listing in 1994. The company will now pay 23.45 cents per share compared with the 23.40 cents paid earlier.

The increased dividend will be paid on Jan 15, to shareholders on record as of Jan 4, 2021. The latest dividend rate marks an annualized amount of $2.814 per share versus the prior rate of $2.808 per share. Based on the company’s share price of $60.40 on Dec 8, it results in a dividend yield of 4.66%.

Solid dividend payouts are the biggest enticement for REIT investors and Realty Income remains committed to boosting shareholder wealth. Remarkably, this retail REIT enjoys a trademark of the phrase “The Monthly Dividend Company”.

The latest hike comes by a marginal figure from the prior dividend paid but the January dividend payments marks the company’s 606 consecutive monthly dividend payments throughout its 51-year operating history. Moreover, the company has made 93 consecutive quarterly dividend hikes, which is encouraging. The retail REIT has witnessed compound average annual dividend growth of 4.4% since its listing on the NYSE.

The latest hike reflects Realty Income’s ability to generate decent cash-flow growth through its operating platform and high-quality portfolio. With a current cash-flow growth rate of 12.23%, higher than the industry’s average of 0.37%, the increased dividend is likely to be sustainable.

Recently, Realty Income reported an increase in contractual rent collections across its portfolio for November, relative to the October and September receipts. As of Nov 30, contractual rent receipts across the REIT’s total portfolio improved to 93.6% for November from October’s 93.3% and September’s 93.2%. Rent collections from its investment-grade rated tenants, which account for 49% of the annualized rental revenues, were 99.9% for November, same as October’s, while it was 100% for September.

Realty Income’s top four industries (reflecting around 37.4% of the annualized rent in November), convenience stores (accounting for 12.2% rental revenues), grocery stores (9.2%), drug stores (8.3%) and dollar stores (7.7%) sell essential goods and continue to thrive even amid the pandemic. The company received 100% of rent due from tenants in these industries for November.

Nonetheless, businesses of physical stores widely depend on customer traffic but consumers are avoiding crowded public spaces due to the pandemic and increasingly opting for online purchases. This, in turn, is taking a huge toll on tenants’ liquidity, thereby making it difficult to meet their rental obligations. As a result, retail REITs, which have already been battling against store closures and bankruptcy issues, are feeling the heat. In fact, apart from Realty Income, this turbulence is affecting other retail REITs, including Macerich MAC, Simon Property SPG and Kimco KIM among others.

For Realty Income too, the company’s tenants from theater (represented 5.7% of total portfolio annualized base rent as of Nov 30, 2020) as well as health and fitness (7%) categories have been affected by the government-mandated closures and the social-distancing wave. As of Dec 2, 2020, percentage of annualized rent for closed locations comprised 60% for theaters tenants, and 18% for health and fitness tenants. As a result, only 12% of theater rent was collected for November. Rent collections in the health and fitness category were 86% for the month.

Nevertheless, Realty Income emerged as a company with decent financial health through its efforts to boost balance-sheet strength despite such a crisis. As of Sep 30, total liquidity amounted to $3.2 billion, including $724.8 million of cash in hand and $2.4 billion remaining borrowing capacity available on its $3-billion revolving credit facility, thereby enjoying healthy financial flexibility. The company also ended the third quarter with low leverage and strong coverage metrics. Further, Realty Income has a credit rating of A- and A3 from Standard & Poor’s and Moody’s, respectively, enabling it to procure debt financing at attractive costs.

Shares of this Zacks Rank #3 (Hold) company have depreciated 2.8% over the past six months as against the industry’s rally of 9.4%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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