Can Realty Income’s Valuation Justify Its Strength After 12.5% Gains This Year?

Thinking about what to do with Realty Income shares? You are definitely not alone. This stock has long been a favorite for dividend-focused investors, but lately, the conversation has shifted toward the company’s true valuation. In the past week, Realty Income has dipped by 1.8%. Even so, its year-to-date performance remains firmly in the green with a 12.5% return. Over the longer haul, it has delivered a solid 27.0% gain over the last five years. However, the last year has been a bit of a flat journey, with just a 0.4% move upward.

Recent changes in the real estate market and investors’ appetite for income-generating stocks are bubbling just under the surface. This brings both opportunities and questions about what is driving this undercurrent. With so many opinions swirling around, is Realty Income undervalued, overhyped, or sitting right where it belongs?

If you are into numbers, here is a quick snapshot: Realty Income currently scores a 2 out of 6 on our valuation scorecard. This indicates it is undervalued in two key measures, but not across the board. While that may not sound like a screaming bargain, it does suggest there could still be some overlooked potential worth investigating. Before you make any decisions, let us break down how the stock stacks up on the most popular valuation checks. The usual approaches might not tell the whole story.

Realty Income scores just 2/6 on our valuation checks. See what other red flags we found in the full valuation breakdown.

Approach 1: Realty Income Discounted Cash Flow (DCF) Analysis

The Discounted Cash Flow (DCF) model estimates a company's intrinsic value by projecting its future adjusted funds from operations and then discounting those cash flows back to what they are worth today. For Realty Income, this means analysts and models extrapolate how much cash the business will produce in future years and assess what investors should pay now for that future potential.

Looking at the numbers, Realty Income reported trailing twelve month free cash flow of $3.62 billion. Based on analyst estimates and further modelling, this figure is expected to grow, reaching about $4.7 billion by 2029. Beyond that, Simply Wall St projects the cash flows for an additional five years, ultimately stretching to more than $5.8 billion by 2035. These projections use a two-stage model that relies on both near-term analyst input and longer-term growth assumptions.

According to the DCF model, Realty Income’s estimated intrinsic value per share comes to $93.43. As of now, that represents a 36.7% discount to the market price, implying the stock is meaningfully undervalued by this methodology.

Result: UNDERVALUED

Head to the Valuation section of our Company Report for more details on how we arrive at this Fair Value for Realty Income.

Our Discounted Cash Flow (DCF) analysis suggests Realty Income is undervalued by 36.7%. Track this in your watchlist or portfolio, or discover more undervalued stocks.

Approach 2: Realty Income Price vs Earnings

The Price-to-Earnings (PE) ratio is a classic valuation metric, especially useful for profitable companies like Realty Income because it directly compares the company’s stock price to its earnings. Investors often look to the PE ratio to judge whether a stock is expensive or cheap relative to its earnings, taking into account growth prospects and any risks that might affect future profitability.

The fair or “normal” PE ratio for a company can be influenced by how quickly it is expected to grow, how stable or risky its earnings are, and the broader market environment. Generally, companies with higher expected growth or lower risk deserve a higher PE ratio, whereas slower growth or higher risks usually mean a lower multiple is justified.

Realty Income is currently trading at a PE ratio of 59.6x. For perspective, its industry (Retail REITs) has an average PE of 26.6x, and its peers average 32.8x. This means Realty Income is priced significantly higher than both its direct competitors and the industry standard, which could concern value-focused investors at first glance.

This is where Simply Wall St’s "Fair Ratio" comes in. Our proprietary Fair Ratio for Realty Income is 40.6x, which reflects a mix of factors such as the company’s earnings growth, profit margins, size, risks, and its industry context. While basic peer or industry averages treat every company the same, the Fair Ratio tailors the expected valuation to Realty Income’s unique strengths and weaknesses, making it a more reliable judgment tool.

With a current PE of 59.6x compared to a Fair Ratio of 40.6x, Realty Income’s valuation looks somewhat stretched. Our analysis suggests the stock is trading above what its fundamentals and outlook would support using this approach.

Result: OVERVALUED

PE ratios tell one story, but what if the real opportunity lies elsewhere? Discover companies where insiders are betting big on explosive growth.

Upgrade Your Decision Making: Choose your Realty Income Narrative

Earlier we mentioned that there is an even better way to understand valuation. Let us introduce you to Narratives. A Narrative is your personal story about a company, connecting your perspective on its future, such as its fair value, revenue growth, earnings outlook, and profit margins, to a specific forecast and resulting valuation.

Rather than just relying on standard ratios, Narratives link a company’s story—why you think it will outperform or underperform—to financial projections and then to a fair value, turning your assumptions into actionable insights. On Simply Wall St's Community page, millions of investors use Narratives as an easy, accessible tool to justify when to buy or sell by comparing their fair value calculations to the current price.

Narratives also respond instantly to new developments such as earnings or breaking news, so your investment thesis stays current without any manual update required. For example, when looking at Realty Income, the most optimistic investor Narrative puts fair value at $75, while the most conservative sets it at $57.97, showing how perspectives and price targets can differ widely depending on inputs and expectations.

Do you think there's more to the story for Realty Income? Create your own Narrative to let the Community know!

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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