My previous blanket on Realty Income Corporation (NYSE:Oh) it was 3 months ago when I rated the stock a “Buy”, calling it a long-term treat for those who can resist short-term market tricks. Since then, the stock has been on the rise approximately 17%, including dividends, compared to the market return of 11%.
Although Realty Income stock still finished 2023 down 10%, in a very strong year in general for stocks, it gained almost 8% over the past month. I present this article with a few reasons why I think the uptrend is likely to continue in 2024. Let’s get into the details.
The yield is still attractive
Despite the recent rise in share price, Realty Income still yields a percentage point higher than the 5-year average yield of 4.28%. Real estate income recently announcement its 123rd consecutive dividend increase of 0.20% which highlighted the funny side many Seeking Alpha readers. Although most of these comments were tongue-in-cheek, the most important takeaway is that it translates into a Dividend growth rate over 5 years of 3.67%, supported by impressive dividend growth over 25 years streak.
No wonder Realty Income’s dividend scores enviably in all 4 categories of Seeking Alpha’s quantitative assessments.
New business milestones as 2024 approaches
- Realty Income’s quarterly revenue crossed the magic $1 billion mark for the first time in recent years. reported The third quarter bodes well for 2024. As rates cool, I expect the trend to continue and expect real estate revenues to exceed $1 billion in quarterly revenues more regularly starting From now.
- Funds from operations (FFO) per share has crossed the $1 mark in 6 of the last 7 quarters, with the third quarter’s $1.04 level being the highest level in at least the last 3 years .
- Realty Income expects its deal with Spirit Realty Capital, Inc. (SRC) which is expected to be finalized in the first calendar quarter of 2024. As with any merger, the true synergy only begins to manifest itself after a few quarters, or even a few years. The agreement is expected to add at least 2.50% to Realty Income’s Adjusted FFO (AFFO) and I fully expect 2024 to start showing the first positive effects of this deal.
No wonder Realty Income is on the list of stocks that show strong potential through 2024 while trading at a reasonable valuation as a hedge. here by Seeking Alpha. According to Goldman Sachs (GS), Realty Income has an industry growth percentile of 81 and an industry value percentile of 21.
Federal Reserve in 2024
Recent message by Federal Reserve Chairman Jerome Powell spurred the market rally to new highs. Not only does the Fed appear to be done with raising rates, but it is also considering the timing of cuts. So, in a matter of months, we have gone from possible additional rate hikes to more hikes, until (not if) rates are cut. No sector is as hard hit as real estate with rising rates and this news should be a welcome relief for REITs heading into 2024, even though Realty Income already had a 98.3% occupancy rate. in the third trimester.
The impact of high interest rates on real estate income was clearly evident on its income statement, with interest expense increasing 56% year-on-year in the third quarter, although much of that increase was attributed to new properties that generate rental income. Overall, Realty Income will welcome projected interest rate reductions as we approach 2024.
Realty Income’s valuation gets a C+ from Seeking Alpha and while that seems low, it’s still better than most of its peers in comparison. The company’s dividend pedigree, growth, and profitability prospects (both earning an impressive A+) make the slightly questionable valuation less concerning.
The fact that the stock has seen two consecutive years of decline does not guarantee that it will recover in 2024, but once you take into account the trajectory of interest rates from 2022 to 2024 (predicted), arguments convincing arguments can be made in favor of a recovery in 2024. Over the last two years, we have gone from a zero interest rate policy (ZIRP) to a rate as high as 8% and even if it t’re no certainty in the world of investing, we can be almost certain that rates have peaked.
Risks and conclusion
I’m glad I made the recommendation to buy Realty Income stock 3 months ago and happier that I followed my own recommendation to get back into stocks after selling at the height of the ZIRP frenzy. I’m bullish on Realty Income for 2024 for the reasons discussed above, but that doesn’t mean there’s no risk.
From a technical point of view, the stock seems a little overbought with a relative strength index (RSI) of 71, after the rise of the last 3 months.
Although rates may have peaked, there is no guarantee that the Federal Reserve will actually cut them, and companies like Realty Income will be able to immediately benefit from lower rates. Additionally, if the Spirit deal does not close or generate synergy as expected, the expected increase in AFFO may not materialize soon, if at all.
To conclude, while I cannot predict where Realty Income’s stock price will be at the end of 2024, I agree with This Looking for an Alpha Investor who Realty Income will send out 12 dividend checks with 4 small increases along the way in 2024. With a 5.25% yield already, that seems like a lot to me, approaching an environment lower rates.