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Is Realty Income's (O) Monthly Dividend Hike Sustainable?

Realty Income Corporation O recently announced its 108th common stock monthly dividend hike since the company’s NYSE listing in 1994. The company will now pay 23.40 cents per share compared with the 23.35 cents paid earlier.

The increased dividend will be paid on Oct 15, to shareholders on record as of Oct 1, 2020. The latest dividend rate marks an annualized amount of $2.808 per share versus the prior rate of $2.802 per share. Based on the company’s share price of $62.35 on Sep 18, it results in a dividend yield of 4.5%.

However, the REIT’s shares have depreciated 2.68% during Friday’s regular session, reflecting broader market concerns.

Solid dividend payouts are the biggest enticement for REIT investors and Realty Income remains committed to boosting shareholder wealth. The company enjoys a trademark of the phrase “The Monthly Dividend Company”.

The latest hike comes by a marginal figure from the prior dividend paid but the October dividend payments marks the company’s 603 consecutive monthly dividend payments throughout its 51-year operating history. Moreover, the company has made 92 consecutive quarterly dividend hikes, which is encouraging. This retail REIT has witnessed compound average annual dividend growth of 4.5% since its listing on the NYSE.

The latest hike reflects Realty Income’s ability to generate decent cash-flow growth through its operating platform and high-quality portfolio. With a current cash-flow growth rate of 12.23%, higher than the industry’s average of 0.37%, the increased dividend is likely to be sustainable.

Realty Income has reported an increase in contractual rent collections for August, relative to July and the second-quarter receipts. As of Sep 1, contractual rent receipts across Realty Income’s total portfolio improved to 93.5% for August from 92.3% for July and 87.8% for the second quarter. Rent collections from its investment-grade rated tenants, which account for 48% of the annualized rental revenues, were already 99.9% for August. This compares with 100% for July and 99.1% for the June-end quarter.

Further, the company’s top 20 tenants, who represent 52.8% of the annualized rental revenues, paid 92.2% of the contractual rent due for August, up from 90.9% due for July and 82.6% due in the second quarter.

Notably, businesses of physical stores widely depend on customer traffic but consumers are avoiding crowded public spaces due to the pandemic and increasingly opting for online purchases. This, in turn, is taking a huge toll on tenants’ liquidity, thereby making it difficult to meet their rental obligations. As a result, retail REITs, which have already been battling against store closures and bankruptcy issues, are feeling the heat. In fact, apart from Realty Income, the downside is affecting other retail REITs, including Macerich MAC, Simon Property SPG and Kimco KIM among others.

However, Realty Income’s top four industries (reflecting around 37% of the annualized rent), namely convenience stores (accounting for 12% rental revenues for second-quarter 2020), drug stores (9.1%), dollar stores (8.1%) and grocery stores (8%) sell essential goods and continued to thrive even during the pandemic. Resultantly, the company received 99.7% of rent due from tenants in these industries for August compared with 99.8% for July and 99.7% for the second quarter.

Though the company’s tenants from theater as well as health and fitness are significantly affected by government-mandated closures and social-distancing requirements, despite such a crisis, Realty Income emerged as a company with decent financial health through its efforts to boost balance-sheet strength.

The company’s new commercial paper program will aid it to drive its near-term liquidity. Moreover, as of Jul 31, total liquidity amounted to $2.9 billion, including roughly $400 million of cash in hand and $2.5 billion of borrowing capacity under its $3-billion revolving credit facility.

The company’s financial policy approach underlines its disciplined debt and equity funding. In fact, its utilization of its at-the-market (ATM) equity program as well as public offering of senior notes indicates the company’s consistent capital-sourcing strategy.

Shares of this Zacks Rank #3 (Hold) company have gained 4.8% quarter to date, outperforming the industry’s increase of 2%. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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