Ah, Realty Income. The dividend stalwart that all dividend investors love. The company with 23 consecutive years of higher dividends. The safe haven that money flocks to when markets are volatile. The company that trademarked the slogan “The Monthly Dividend Company.” The company that has paid 551 consecutive monthly dividends, spanning 45 years.
Despite its undoubtedly impressive record as described above, and as much as we love this company for the passive income it consistently provides each month, given its recent price at $69.91 is it time to consider that Realty Income may be overvalued?
I would say yes. Realty Income is up around 35% this year. Stop and consider that. 35%, when the S&P 500 is only up 5% or so. Realty Income trades at 24 times 2016’s expected FFO (funds from operations) and has a twelve-months-trailing P/E ratio of 65. This shouts overvalued to me. O has not had a higher P/E ratio anywhere near this in the last 10 years.
If there is still doubt, consider the following:
- Morningstar currently has it rated with 1 star.
- Yahoo Finance (which I get, is just that, but still) states that it has a 1yr target of 60.67.
- Morningstar’s “consider selling” mark is at 68.85, which O blew past when it was recently trading in the 70s.
- Do we really think that O has created 35% of sustainable company value in just six months? And if so, do we really think that there is more left to make this an attractive investment at this current price?
- And finally, if you enjoy doing any technical analysis, the chart below shows it is overbought as well:
All of this pains me to say it because I love O, and actually own some shares myself, though it is now my smallest holding. With a yield of just 3.34% (even after its near 2% pullback that it recently had on Friday), there is not enough value left to tempt me at current prices.
In closing, despite its consistent dividend, most of us need to think about total return for our investments (and those that don’t need to, still should think about it with their new capital). Remember, that is dividend yield + capital gains/losses for our investment return. Do not expect too much more in terms of capital appreciation, though with low interest rates it could continue higher for the short-term, but again, even its yield is relatively low at current prices. This all suggests a low future return.
What do you think?
If you would like more investing commentary and insights, please visit Passive Income Dude at www.passiveincomedude.blogspot.com where I share my journey to financial freedom through my own disciplined dividend and real estate investing. Thanks for reading!