Company Profile (excerpt from Reuters): Realty Income Corporation, incorporated on March 25, 1997, is a real estate investment trust (REIT). The Company is engaged in in-house acquisition, portfolio management, asset management, credit research, real estate research, legal, finance and accounting, information technology and capital markets capabilities. As of December 31, 2016, the Company owned a diversified portfolio of 4,944 properties located in 49 states and Puerto Rico, with over 83.0 million square feet of leasable space leased to 248 different commercial tenants doing business in 47 separate industries. As of December 31, 2016, of the 4,944 properties in the portfolio, 4,920, or 99.5%, were single-tenant properties, and the remaining were multi-tenant properties. As of December 31, 2016, of the 4,920 single-tenant properties, 4,836 were leased with a weighted average remaining lease term (excluding rights to extend a lease at the option of the tenant) of approximately 9.8 years.
Downloadable PDF version of this valuation:
ModernGraham Valuation of O – February 2019
Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?
What kind of Intelligent Investor are you?
| Defensive Investor; must pass 6 out of the following 7 tests. | ||||
| 1. Adequate Size of the Enterprise | Market Cap > $2Bil | $20,684,700,386 | Pass | |
| 2. Sufficiently Strong Financial Condition | Current Ratio > 2 | 1.21 | Fail | |
| 3. Earnings Stability | Positive EPS for 10 years prior | Pass | ||
| 4. Dividend Record | Dividend Payments for 10 years prior | Pass | ||
| 5. Earnings Growth | Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end | 12.23% | Fail | |
| 6. Moderate PEmg Ratio | PEmg < 20 | 61.13 | Fail | |
| 7. Moderate Price to Assets | PB Ratio < 2.5 OR PB*PEmg < 50 | 2.65 | Fail | |
| Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor. | ||||
| 1. Sufficiently Strong Financial Condition | Current Ratio > 1.5 | 1.21 | Fail | |
| 2. Sufficiently Strong Financial Condition | Debt to NCA < 1.1 | 172.66 | Fail | |
| 3. Earnings Stability | Positive EPS for 5 years prior | Pass | ||
| 4. Dividend Record | Currently Pays Dividend | Pass | ||
| 5. Earnings Growth | EPSmg greater than 5 years ago | Pass | ||
Stage 2: Determination of Intrinsic Value
| EPSmg | $1.15 |
| MG Growth Estimate | 2.50% |
| MG Value | $15.49 |
| Opinion | Overvalued |
| MG Grade | D+ |
| MG Value based on 3% Growth | $16.63 |
| MG Value based on 0% Growth | $9.75 |
| Market Implied Growth Rate | 26.31% |
| Current Price | $70.09 |
| % of Intrinsic Value | 452.55% |
Realty Income Corp does not satisfy the requirements of either the Enterprising Investor or the more conservative Defensive Investor. The Defensive Investor is concerned with the low current ratio, insufficient earnings growth over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor has concerns regarding the level of debt relative to the current assets. As a result, all value investors following the ModernGraham approach should explore other opportunities at this time or proceed cautiously with a speculative attitude.
As for a valuation, the company appears to be Overvalued after growing its EPSmg (normalized earnings) from $0.98 in 2014 to an estimated $1.15 for 2018. This level of demonstrated earnings growth does not support the market’s implied estimate of 26.31% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.
At the time of valuation, further research into Realty Income Corp revealed the company was trading above its Graham Number of $26.88. The company pays a dividend of $2.54 per share, for a yield of 3.6%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 61.13, which was below the industry average of 81.61, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-24.59.
Realty Income Corp scores quite poorly in the ModernGraham grading system, with an overall grade of D+.
Stage 3: Information for Further Research
| Net Current Asset Value (NCAV) | -$24.59 |
| Graham Number | $26.88 |
| PEmg | 61.13 |
| Current Ratio | 1.21 |
| PB Ratio | 2.65 |
| Current Dividend | $2.54 |
| Dividend Yield | 3.62% |
| Number of Consecutive Years of Dividend Growth | 19 |
Useful Links:
| ModernGraham tagged articles | Morningstar |
| Google Finance | MSN Money |
| Yahoo Finance | Seeking Alpha |
| GuruFocus | SEC Filings |
Most Recent Balance Sheet Figures
| Balance Sheet Information | 9/1/2018 |
| Total Current Assets | $224,158,000 |
| Total Current Liabilities | $184,893,000 |
| Long-Term Debt | $6,779,659,000 |
| Total Assets | $15,095,325,000 |
| Intangible Assets | $1,227,540,000 |
| Total Liabilities | $7,384,071,000 |
| Shares Outstanding (Diluted Average) | 291,207,000 |
Earnings Per Share History
| EPS History | |
| Next Fiscal Year Estimate | $1.24 |
| Dec2017 | $1.10 |
| Dec2016 | $1.13 |
| Dec2015 | $1.09 |
| Dec2014 | $1.04 |
| Dec2013 | $1.06 |
| Dec2012 | $0.73 |
| Dec2011 | $1.05 |
| Dec2010 | $1.01 |
| Dec2009 | $1.03 |
| Dec2008 | $1.06 |
| Dec2007 | $1.16 |
| Dec2006 | $1.11 |
| Dec2005 | $1.12 |
| Dec2004 | $1.15 |
| Dec2003 | $1.08 |
| Dec2002 | $1.01 |
| Dec2001 | $0.88 |
| Dec2000 | $0.85 |
| Dec1999 | $0.77 |
| Dec1998 | $0.78 |
Earnings Per Share – ModernGraham History
| EPSmg History | |
| Next Fiscal Year Estimate | $1.15 |
| Dec2017 | $1.10 |
| Dec2016 | $1.07 |
| Dec2015 | $1.02 |
| Dec2014 | $0.98 |
| Dec2013 | $0.96 |
| Dec2012 | $0.93 |
| Dec2011 | $1.04 |
| Dec2010 | $1.05 |
| Dec2009 | $1.08 |
| Dec2008 | $1.11 |
| Dec2007 | $1.13 |
| Dec2006 | $1.11 |
| Dec2005 | $1.09 |
| Dec2004 | $1.05 |
| Dec2003 | $0.97 |
| Dec2002 | $0.90 |
Recommended Reading:
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Disclaimer:
The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.
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