Real Estate Income Corporation (NYSE: O) shareholders saw the share price fall by 11% over the month. But the silver lining is that the stock is up over five years. During this period, it has increased by 19%, which is not bad, but is below the market return of 79%.
Although the stock has fallen 7.0% this week, it is worth focusing on the long term and seeing if historical stock returns have been driven by underlying fundamentals.
In his test The Graham-and-Doddsville super-investors Warren Buffett has described how stock prices don’t always rationally reflect a company’s value. By comparing earnings per share (EPS) and share price changes over time, we can get an idea of how investors’ attitudes toward a company change over time.
Realty Income’s earnings per share are down 7.7% annually, despite a strong five-year share price performance.
Given that EPS is down sharply, it seems very unlikely that market players will turn to EPS to value the business. Given that EPS is down, but the share price is up, it seems clear that the market is currently focused on other aspects of the business.
In fact, the dividend has increased over time, which is positive. It could be that the company is reaching maturity and dividend investors are buying for yield. We postulate that income growth over the past five years of 13% per year would encourage people to invest.
The company’s revenues and profits (over time) are shown in the image below (click to see exact figures).
This free real estate income interactive report balance sheet strength is a great place to start, if you want to investigate the stock further.
What about dividends?
It is important to consider the total shareholder return, as well as the stock price return, for a given stock. TSR is a calculation of return that takes into account the value of cash dividends (assuming any dividends received have been reinvested) and the calculated value of all discounted capital raisings and spinoffs. So for companies that pay a generous dividend, the TSR is often much higher than the stock price return. It turns out that Realty Income’s TSR for the past 5 years was 52%, which exceeds the stock price return mentioned earlier. The dividends paid by the company thus inflated the total return to shareholders.
A different perspective
We are pleased to report that Realty Income shareholders received a 6.1% year-over-year total shareholder return. And that includes the dividend. However, the five-year TSR of 9% per year is even more impressive. Potential buyers might understandably feel like they’ve missed the opportunity, but it’s always possible that business is still going strong. I find it very interesting to look at stock price over the long term as a proxy for company performance. But to really get insight, we also need to consider other information. To do this, you need to find out about the 4 warning signs we spotted some with Realty Income (including 2 that were a little unpleasant) .
If you’d rather check out another company – one with potentially superior finances – then don’t miss this free list of companies that have proven that they can increase their profits.
Please note that the market returns quoted in this article reflect the average market-weighted returns of stocks currently trading on US exchanges.
Feedback on this article? Concerned about content? Get in touch with us directly. You can also email the editorial team (at) Simplywallst.com.
This Simply Wall St article is general in nature. We provide commentary based on historical data and analyst forecasts only using unbiased methodology and our articles are not intended to be financial advice. It is not a recommendation to buy or sell stocks and does not take into account your objectives or financial situation. Our goal is to bring you targeted long-term analysis based on fundamental data. Note that our analysis may not take into account the latest announcements from price-sensitive companies or qualitative materials. Simply Wall St has no position in the stocks mentioned.