And what makes Realty Income’s track record so impressive is that the stock has actually delivered higher returns with less volatility that major market indexes as the following chart shows.
This track record is remarkable considering the indexes (which include a basket of stocks) usually deliver lower volatility than an individual security such as Realty Income. However, despite this impressive track record, the company is sending signals that we may expect lower growth going forward.
1. Lower Growth Signals
The first signal that management may be expecting lower growth ahead is simply the dividend yield. The following chart shows how management has allowed the dividend yield to decline relative to the S&P 500 in recent years.
Realty Income Corp (NYSE:O)’s dividend increases (while impressive) have not kept pace with its stock price increase. We interpret this as an indication that management believes the stock price increases will not continue at the same rapid pace as they have in the past, otherwise the dividend yield would have been kept closer to constant. Management teams are careful about setting dividend payment policies so as not to be an outlier relative to peers (after all, it’s the dividend that attracts many investors in the first place), and we believe the fact that management hasn’t raised the dividend more aggressively is an indication that perhaps they expect the yield to normalize (relative to peers and history) as future stock price increases slow (note: we’ll have more on the dividend payout ratio).
Another indication that management expects lower future stock price appreciation is the fact that insider ownership is not significant and it’s declining as shown in the following chart.
If management believed strongly in the company’s future growth prospects they’d likely increase ownership (or not let it fall as is the case with Realty Income).
Further, management has not been buying back shares (they’ve actually been issuing more) suggesting they may believe the shares are overvalued. And in fact they’ve been using ownership to structure deals suggesting they believe the shares are richly valued (and using shares in this way can actually harm existing shareholders by diluting their existing interest in the company- more on this later).
Additional indications of lower future growth are simply Realty Income’s large size. Specifically, it’s larger than many of its peers, and it will take more actual growth for Realty Income to achieve the same level percentage growth as in the past. Additionally, competition is creeping in as management describes in the annual report:
In order to grow we need to continue to acquire investment properties. The acquisition of investment properties may be subject to competitive pressures. We face competition in the acquisition and operation of our properties. We expect competition from: Businesses; Individuals; Fiduciary accounts and plans; and other entities engaged in real estate investment and financing.