Is Weakness In Kimco Realty Corporation (NYSE:KIM) Stock A Sign That The Market Could be Wrong Given Its Strong Financial Prospects?

By
Simply Wall St
Published
July 25, 2021
NYSE:KIM
Source: Shutterstock

It is hard to get excited after looking at Kimco Realty's (NYSE:KIM) recent performance, when its stock has declined 1.5% over the past week. However, a closer look at its sound financials might cause you to think again. Given that fundamentals usually drive long-term market outcomes, the company is worth looking at. Particularly, we will be paying attention to Kimco Realty's ROE today.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In other words, it is a profitability ratio which measures the rate of return on the capital provided by the company's shareholders.

View our latest analysis for Kimco Realty

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Kimco Realty is:

18% = US$1.1b ÷ US$5.7b (Based on the trailing twelve months to March 2021).

The 'return' refers to a company's earnings over the last year. That means that for every $1 worth of shareholders' equity, the company generated $0.18 in profit.

What Has ROE Got To Do With Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. Depending on how much of these profits the company reinvests or "retains", and how effectively it does so, we are then able to assess a company’s earnings growth potential. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

Kimco Realty's Earnings Growth And 18% ROE

To begin with, Kimco Realty seems to have a respectable ROE. Especially when compared to the industry average of 5.1% the company's ROE looks pretty impressive. This certainly adds some context to Kimco Realty's decent 13% net income growth seen over the past five years.

We then compared Kimco Realty's net income growth with the industry and we're pleased to see that the company's growth figure is higher when compared with the industry which has a growth rate of 9.9% in the same period.

past-earnings-growth
NYSE:KIM Past Earnings Growth July 26th 2021

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. The investor should try to establish if the expected growth or decline in earnings, whichever the case may be, is priced in. Doing so will help them establish if the stock's future looks promising or ominous. What is KIM worth today? The intrinsic value infographic in our free research report helps visualize whether KIM is currently mispriced by the market.

Is Kimco Realty Efficiently Re-investing Its Profits?

Kimco Realty seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 85%, meaning the company retains only 15% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. In spite of this, the company was able to grow its earnings by a fair bit, as we saw above.

Moreover, Kimco Realty is determined to keep sharing its profits with shareholders which we infer from its long history of paying a dividend for at least ten years. Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to drop to 58% over the next three years. Regardless, the future ROE for Kimco Realty is predicted to decline to 4.1% despite the anticipated decrease in the payout ratio. We reckon that there could probably be other factors that could be driving the forseen decline in the company's ROE.

Summary

In total, we are pretty happy with Kimco Realty's performance. We are particularly impressed by the considerable earnings growth posted by the company, which was likely backed by its high ROE. While the company is paying out most of its earnings as dividends, it has been able to grow its earnings in spite of it, so that's probably a good sign. That being so, according to the latest industry analyst forecasts, the company's earnings are expected to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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