Realty Income: Strong 2023 Close Augurs Well For 2024 (NYSE:O)

My previous coverage on Realty Income Corporation (NYSE:O) was 3 months ago when I rated the stock a “Buy”, calling it a long-term treat for those who can withstand the market’s tricks in the short term. Since then, the stock is up about 17%, including dividends, compared to the market’s 11% return.

Even though Realty Income stock still finished 2023 down 10% in a very strong year in general for stocks, it gained nearly 8% in the last month. I am presenting this article with a few reasons why I believe the uptrend is likely to continue in 2024. Let us get into the details.

The Yield Is Still Attractive

Despite the recent uptick in share price, Realty Income still yields a full percentage point higher than the 5-year average yield of 4.28%. Realty Income recently announced its 123rd consecutive dividend increase of 0.20% which brought out the funny side of many Seeking Alpha readers. While most of these comments were tongue-in-cheek, the larger takeaway is that this translates to a 5-year dividend growth rate of 3.67%, backed up by an impressive 25-year dividend growth streak.

No wonder, Realty Income’s dividend gets enviable grades in all 4 categories from Seeking Alpha’s quant ratings.

New Business Landmarks Heading Into 2024

• Realty Income’s quarterly revenue crossed the magical $1 billion mark for the first time ever in the recently reported Q3, which augurs well heading into 2024. With rates cooling down, I fully expect the trend to continue and expect Realty Income to cross $1 billion in quarterly revenue more regularly from here on.

• Funds From Operations (FFO) per share has crossed $1 mark in 6 out of the last 7 quarters, with Q3’s $1.04 being the highest level at least over the last 3 years.

• Realty Income expects its deal with Spirit Realty Capital, Inc. (SRC) to close in the first calendar quarter of 2024. As with any merger, the real synergy starts showing up only after a few quarters, if not years. The deal is expected to add at least 2.50% to Realty Income’s Adjusted FFO (AFFO) and I fully expect 2024 to start showing the early positive effects of this deal.

No wonder, Realty Income made it to the list of stocks that show strong potential heading into 2024 while trading at reasonable valuation as covered here by Seeking Alpha. According to Goldman Sachs (GS), Realty Income has a growth percentile within the sector of 81 and value percentile within the sector of 21.

Federal Reserve In 2024

Recent message from Federal Reserve chairman Jerome Powell spurred the market’s rally to new highs. Not only is the Fed appearing done with rising rates but is also considering the timing of the cuts. So, within a few months, we went from possibly more rate hikes to no more hikes to when (and not if) rates will be cut. No sector gets as impacted as real estate with rising rates and this news should be a welcome relief for REITs heading into 2024, although Realty Income already had a 98.3% occupancy rate in Q3.

The impact of high interest rates on Realty Income showed up clearly on its income statement as interest expenses went up 56% YoY in Q3, although quite a bit of this is attributed to new properties that bring in rental revenue. Overall, Realty Income will be welcoming the projected cuts in interest rates as we head into 2024.

Valuation

Realty Income’s valuation gets a C+ from Seeking Alpha and while that sounds low, it is still better than most of the peers in comparison. The company’s dividend pedigree, growth, and profitability prospects (both of which get an impressive A+) make the slightly questionable valuation less worrisome.

The fact that the stock had two consecutive down years is no guarantee that it will turn around in 2024 but once you factor in the interest rate trajectory from 2022 to 2024 (projected), a compelling case can be made for a turnaround in 2024. In the last two years, we went from Zero Interest-Rate Policy (ZIRP) to as high as 8% and while there are no certainties in the world of investing, we can be almost certain that rates have peaked.

Risks And Conclusion

I am glad that I made the recommendation to buy Realty Income stock 3 months ago and gladder that I followed my own recommendation to get back into the stock after selling at the height of ZIRP frenzy. I am optimistic of Realty Income’s 2024 for the reasons covered above but that does not mean there are no risks.

From the technical perspective, the stock appears a little bit overbought with a Relative Strength Index [RSI] of 71, on the back of the run in the last 3 months.

While rates may have peaked, there is no guarantee that the Federal Reserve will actually slash the rates, and companies like Realty Income will be able to immediately take advantage of the lower rates. In addition, if the Spirit deal does not close nor synergize as expected, the expected increase to AFFO may not materialize soon, if at all.

To conclude, while I cannot predict where Realty Income’s stock price will be at the end of 2024, I agree with this Seeking Alpha investor that Realty Income will send in 12 dividend checks with 4 small increases along the way in 2024. With a yield of 5.25% already, that sounds like a great deal to me, heading into lower rates environment.