Can Mixed Fundamentals Have A Negative Impact on National Retail Properties, Inc. (NYSE:NNN) Current Share Price Momentum?

National Retail Properties' (NYSE:NNN) stock is up by a considerable 26% over the past three months. However, we decided to pay attention to the company's fundamentals which don't appear to give a clear sign about the company's financial health. In this article, we decided to focus on National Retail Properties' ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. In short, ROE shows the profit each dollar generates with respect to its shareholder investments.

View our latest analysis for National Retail Properties

How Do You Calculate Return On Equity?

The formula for return on equity is:

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

So, based on the above formula, the ROE for National Retail Properties is:

5.6% = US$241m ÷ US$4.3b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. That means that for every $1 worth of shareholders' equity, the company generated $0.06 in profit.

Why Is ROE Important For Earnings Growth?

We have already established that ROE serves as an efficient profit-generating gauge for a company's future earnings. We now need to evaluate how much profit the company reinvests or "retains" for future growth which then gives us an idea about the growth potential of the company. 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.

National Retail Properties' Earnings Growth And 5.6% ROE

When you first look at it, National Retail Properties' ROE doesn't look that attractive. Yet, a closer study shows that the company's ROE is similar to the industry average of 5.4%. Even so, National Retail Properties has shown a fairly decent growth in its net income which grew at a rate of 7.2%. Given the slightly low ROE, it is likely that there could be some other aspects that are driving this growth. Such as - high earnings retention or an efficient management in place.

We then compared National Retail Properties' net income growth with the industry and found that the company's growth figure is lower than the average industry growth rate of 12% in the same period, which is a bit concerning.

Earnings growth is an important metric to consider when valuing a stock. 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. Has the market priced in the future outlook for NNN? You can find out in our latest intrinsic value infographic research report.

Is National Retail Properties Making Efficient Use Of Its Profits?

National Retail Properties seems to be paying out most of its income as dividends judging by its three-year median payout ratio of 88%, meaning the company retains only 12% of its income. However, this is typical for REITs as they are often required by law to distribute most of their earnings. Despite this, the company's earnings grew moderately as we saw above.

Additionally, National Retail Properties has paid dividends over a period of at least ten years which means that the company is pretty serious about sharing its profits with shareholders. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 74%. Regardless, the future ROE for National Retail Properties is predicted to rise to 7.6% despite there being not much change expected in its payout ratio.

Summary

In total, we're a bit ambivalent about National Retail Properties' performance. While no doubt its earnings growth is pretty respectable, the low profit retention could mean that the company's earnings growth could have been higher, had it been paying reinvesting a higher portion of its profits. An improvement in its ROE could also help future earnings growth. Having said that, looking at the current analyst estimates, we found that the company's earnings are expected to gain momentum. 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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