Has Realty Income Corporation's (NYSE:O) Impressive Stock Performance Got Anything to Do With Its Fundamentals?

By
Simply Wall St
Published
June 15, 2021
NYSE:O

Realty Income's (NYSE:O) stock is up by a considerable 10% over the past three months. 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. In this article, we decided to focus on Realty Income's ROE.

ROE or return on equity is a useful tool to assess how effectively a company can generate returns on the investment it received from its shareholders. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for Realty Income

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 Realty Income is:

3.0% = US$346m ÷ US$12b (Based on the trailing twelve months to March 2021).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every $1 worth of equity, the company was able to earn $0.03 in profit.

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. 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. 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.

Realty Income's Earnings Growth And 3.0% ROE

As you can see, Realty Income's ROE looks pretty weak. Even compared to the average industry ROE of 5.1%, the company's ROE is quite dismal. Realty Income was still able to see a decent net income growth of 10% over the past five years. We believe that there might be other aspects that are positively influencing the company's earnings growth. For instance, the company has a low payout ratio or is being managed efficiently.

As a next step, we compared Realty Income's net income growth with the industry and found that the company has a similar growth figure when compared with the industry average growth rate of 10.0% in the same period.

past-earnings-growth
NYSE:O Past Earnings Growth June 16th 2021

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). This then helps them determine if the stock is placed for a bright or bleak future. What is O worth today? The intrinsic value infographic in our free research report helps visualize whether O is currently mispriced by the market.

Is Realty Income Efficiently Re-investing Its Profits?

Realty Income has a high three-year median payout ratio of 84%. This means that it has only 16% of its income left to reinvest into its business. However, it's not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Despite this, the company's earnings grew moderately as we saw above.

Additionally, Realty Income 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 77%. Regardless, the future ROE for Realty Income is predicted to rise to 4.8% despite there being not much change expected in its payout ratio.

Summary

Overall, we feel that Realty Income certainly does have some positive factors to consider. That is, quite an impressive growth in earnings. However, the low profit retention means that the company's earnings growth could have been higher, had it been reinvesting a higher portion of its profits. 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 latest analysts predictions for the company, check out this visualization of analyst forecasts for the company.

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This article by Simply Wall St is general in nature. 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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