Stock Analysis

Kimco Realty Corporation's (NYSE:KIM) Stock Has Seen Strong Momentum: Does That Call For Deeper Study Of Its Financial Prospects?

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NYSE:KIM
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Kimco Realty's (NYSE:KIM) stock is up by a considerable 45% over the past month. We wonder if and what role the company's financials play in that price change as a company's long-term fundamentals usually dictate market outcomes. Specifically, we decided to study Kimco Realty's ROE in this article.

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.

Check out our latest analysis for Kimco Realty

How To Calculate Return On Equity?

ROE 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:

16% = US$911m ÷ US$5.6b (Based on the trailing twelve months to September 2020).

The 'return' is the yearly profit. So, this means that for every $1 of its shareholder's investments, the company generates a profit of $0.16.

What Has ROE Got To Do With Earnings Growth?

Thus far, we have learned that ROE measures how efficiently a company is generating its profits. 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. Generally speaking, other things being equal, firms with a high return on equity and profit retention, have a higher growth rate than firms that don’t share these attributes.

A Side By Side comparison of Kimco Realty's Earnings Growth And 16% ROE

To start with, Kimco Realty's ROE looks acceptable. Especially when compared to the industry average of 5.4% the company's ROE looks pretty impressive. Despite this, Kimco Realty's five year net income growth was quite flat over the past five years. We reckon that there could be some other factors at play here that's limiting the company's growth. Such as, the company pays out a huge portion of its earnings as dividends, or is faced with competitive pressures.

Next, on comparing with the industry net income growth, we found that the industry grew its earnings by12% in the same period.

past-earnings-growth
NYSE:KIM Past Earnings Growth December 5th 2020

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. It’s important for an investor to know whether the market has priced in the company's expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. Is KIM fairly valued? This infographic on the company's intrinsic value has everything you need to know.

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 87%, meaning that the company retains only 13% of its profits. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Accordingly, this suggests that the company's earnings growth was miniscule as a result of the high payout.

Moreover, Kimco Realty has been paying dividends for at least ten years or more suggesting that management must have perceived that the shareholders prefer dividends over earnings growth. Our latest analyst data shows that the future payout ratio of the company is expected to drop to 54% over the next three years. Regardless, the future ROE for Kimco Realty is predicted to decline to 6.7% 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, it does look like Kimco Realty has some positive aspects to its business. Although, we are disappointed to see a lack of growth in earnings even in spite of a high ROE. Bear in mind, the company reinvests a small portion of its profits, which means that investors aren't reaping the benefits of the high rate of return. Moreover, after studying current analyst estimates, we discovered that the company's earnings are expected to continue to shrink in the future. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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