Spotlight: 1 High-paying Dividend Stock Is Way Undervalued

Wall Street analysts seem pretty gung-ho about Realty Income, pegging an average price target at $68 per share, a significant pop from where the stock sits now. That’s in addition to a dividend yield north of 6%.

Is Wall Street right or is the recent selloff indicative of what’s to come for Realty Income?

Key Points

• Analysts have a bullish outlook on Realty Income, setting a consensus price target of $68 per share. This is accompanied by a strong dividend yield exceeding 6%.
• Realty Income has shown a tripling in operating income since 2020, which contrasts with its recent share price underperformance due to rising in interest rates.
• The company’s diversified property portfolio could act as a buffer against industry-specific risks and interest rate hikes.

Dividend Sustainability?

Realty Income has an eyebrow-raising payout ratio above 220%. Typically a figure above 75% would raise questions that the company is paying too high a dividend relative to its financial capability.

Still, Realty Income does make the Dividend Aristocrats list for its consistency in paying a stable dividend, so it shouldn’t be underestimated that it will continue to do so. The bigger question at hand is whether the size of the yield is sustainable.

Good Looking Profit and Loss Statement

The uptick in operating income, which has tripled over the last three years, raises questions about why the stock has underperformed recently. The likely culprit could be the recent hike in interest rates, which has made investors jittery about Realty Income’s business model.

It should be emphasized that the company, in spite of the plunge year-to-date, has continued to report exceptional top line growth every quarter this decade. So, this is a management team that can operate successfully through challenges such as COVID, as well as the bear market in 2022, and the most recent 2023 upswing.

The Debt Conundrum

Another factor making investors uneasy is the firm’s debt level, standing at a staggering $20 billion against a paltry cash reserve of around $250 million.

Having high debt levels is part and parcel of Realty Income’s business model to acquire new properties but this debt-financed growth strategy could hit a wall if liquidity issues arise, forcing the company to either liquidate assets or take on additional debt at higher interest rates.

Still, the diversified nature of Realty Income’s portfolio makes it less susceptible to industry-specific risks and it acts as a built-in defense mechanism that could potentially mitigate some of the interest rate risk that has investors concerned.

The Bottom Line

Realty Income offers a high dividend yield and appears undervalued but its dividend is potentially in jeopardy. Until we see a reversal in the Fed’s interest rate policy, it seems a risky bet at this time to jump on board a stock that is clearly in a short-term and long-term downtrend.

With that said, Realty Income has a lot of elements that make a compelling long-term investment when the macroeconomic tides turn.