Realty Income (O) reported second-quarter earnings on Wednesday, and Wall Street took the news well. O stock was up by nearly 1% in after-hours trading — something that has become rare in an otherwise disappointing earnings season.
Adjusted funds from operations (AFFO) — the REIT equivalent of earnings — jumped by 6.3% per share over the year before, and management raised per-share AFFO guidance for the full year to $2.69-$2.73 from its previous estimate of $2.66-$2.71. Those numbers represent growth of about 5% to 6% for all of 2015 — exactly the kind of slow, steady growth you expect from Realty Income.
If your own O stock, it’s safe to assume that the dividend was a major factor in your decision to buy. Well, Realty Income increased its monthly dividend in June for the 81st time and for the 71st consecutive quarter. At current prices, O stock yields about 4.8%.
All of this is great. Realty Income had another great quarter. But the truth is, I could really care less. Realty Income earnings don’t matter to me — at all. And I say this as a long-term holder of the stock.
O Stock Is Great Regardless of Earnings
I love Realty Income precisely because of its boring disposition. Realty Income doesn’t really “do” anything. It simply buys quality free-standing retail properties that, as a general rule, are already throwing off healthy cash flows and then converts those cash flows into monthly dividends for its shareholders.
And as a triple-net landlord, Realty Income doesn’t have to worry about leaky toilets or peeling paint. All maintenance, insurance and taxes are the tenants’ responsibility.
At the end of the most recent quarter, Realty Income had expanded its portfolio to 4,452 properties located in 49 states and Puerto Rico, leased to 235 commercial tenants doing business in 47 industries. And adding an additional layer of safety, the weighted-average remaining lease term of its properties is more than 10 years.
I almost feel sorry for the Wall Street analyst that cover Realty Income. Following a stock that is this steady and predictable must be about as exciting as watching paint peel.
Realty Income is not a sexy stock, and it’s certainly not one to buy if you’re looking to get rich quick. But it is one of the few stocks anywhere in the world that I believe you can really buy and hold forever.
Unless Realty Income decides to merge with another REIT — or unless we see the actual end of days (in which case, we have bigger problems) — I can say with certainty that I expect Realty Income to look the same a generation from now, throwing off a stable monthly dividend from a portfolio of high-quality properties.
If you’re retired, Realty Income is a no-brainer to own. I consider it as safe as a high-quality corporate bond — though, unlike a bond, O stock’s cash payout actually rises over time.
Bottom Line on O Stock
Is there anything not to like about Realty Income?
Well, there is that whole “Fed thing.” Income-focused stocks have performed poorly in 2015 due to fears that the Fed will finally lift short-term rates above 0% later this year. This fear of the unknown has lead bond yields across the yield curve to rise in anticipation.
We saw something similar in 2013 during the “taper tantrum.” Fears of what might happen once the Fed tapered its quantitative easing program caused a massive selloff in REITs and other income stocks, including Realty Income. But as the market slowly came to realize that the fears were overblown, yields fell and REITs enjoyed a fantastic rally.
I see something similar happening this time around as well. As much as the Fed would love to raise rates, inflation expectations remain low, and low yields overseas act like an anchor to our relatively higher yields here.
This is a long way of saying that I expect O stock to perform just fine in the years ahead, come what may at the next Fed meeting.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. As of this writing, he was long Realty Income. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays.
