Is Realty Income Corporation’s (NYSE:O) stock price struggling due to its mixed financials?

Realty Income Inc (NYSE:O) had a difficult month with its share price down 4.9%. However, we decided to study the company’s financial statements to determine if they had anything to do with the price drop. Long-term fundamentals are usually what drive market outcomes, so pay close attention to them. Specifically, we decided to study the ROE of Realty Income in this article.

Return on Equity or ROE is a test of how effectively a company increases its value and manages investors’ money. In other words, it reveals the company’s success in turning shareholders’ investments into profits.

Check out our latest property income analysis

How do you calculate return on equity?

ROE can be calculated using the formula:

Return on equity = Net income (from continuing operations) ÷ Equity

So, based on the above formula, the ROE for property income is:

2.1% = $564 million ÷ $26 billion (based on trailing 12 months to June 2022).

“Yield” is the income the business has earned over the past year. Another way to think about this is that for every dollar of equity, the company was able to make a profit of $0.02.

Why is ROE important for earnings growth?

So far we have learned that ROE is a measure of a company’s profitability. Based on the share of its profits that the company chooses to reinvest or “keep”, we are then able to assess a company’s future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and earnings retention, the higher a company’s growth rate relative to companies that don’t necessarily exhibit these characteristics.

Realty Income earnings growth and ROE of 2.1%

It is clear that the ROE of Realty Income is rather weak. Not only that, even compared to the industry average of 6.6%, the company’s ROE is quite unremarkable. Realty Income was still able to see a decent net income growth of 8.0% over the past five years. We believe there could be other factors at play here. For example, the business has a low payout ratio or is efficiently managed.

Then, when comparing with industry net income growth, we found that Realty Income’s reported growth was lower than industry growth by 11% over the same period, which we don’t like. no see.

Earnings growth is an important factor in stock valuation. What investors then need to determine is whether the expected earnings growth, or lack thereof, is already priced into the stock price. This will help them determine if the future of the title looks bright or ominous. If you’re wondering about Realty Income’s valuation, check out this indicator of its price-earnings ratio, relative to its industry.

Does real estate income effectively reinvest its profits?

Realty Income appears to be paying out most of its income in the form of dividends judging by its three-year median payout ratio of 84%, which means the company only keeps 16% of its income. However, this is typical for REITs as they are often required by law to distribute most of their profits. Despite this, the company’s earnings grew moderately as seen above.

Additionally, Realty Income is committed to continuing to share its earnings with shareholders, which we infer from its long history of paying dividends for at least ten years. After reviewing the latest analyst consensus data, we found that the company is expected to continue to pay out around 74% of its earnings over the next three years. Either way, the future ROE for real estate income is expected to reach 3.8% despite little change expected in its payout ratio.

Conclusion

Overall, we believe that the performance displayed by Realty Income can be subject to many interpretations. While there is no doubt that its earnings growth is quite respectable, low earnings retention could mean that the company’s earnings growth could have been higher, had it paid off by reinvesting a larger portion. of its profits. An improvement in its ROE could also contribute to its future earnings growth. That said, looking at current analyst estimates, we found that the company’s earnings are expected to accelerate. To learn more about the latest analyst forecasts for the company, check out this analyst forecast visualization for the company.

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.