Time for Another Performance Check

For some background on the idea behind the Performance Check, and the XIRR function used for the calculations, please see my first post in this series.

The series continues with a look at another dividend-paying stock from my Portfolio.  Last month was a check on REIT W.P. Carey (WPC), and this time I’ll be checking my performance on another large net lease REIT – Realty Income (O).  O exists in many DGI portfolios, so I imagine many readers will either be owners of the stock, or at least be familiar with it.

The company has over 5,950 properties in its portfolio.  The properties are spread across 49 different industries.  Over 82% of the properties are in the retail space, with nearly 12% in industrial, 4% in office and 2% in agriculture.

Occupancy in O’s properties stood at 98.3% at the end of Q2’19.  More impressively, occupancy has never been lower than 96.6% since 1992.  O’s three largest tenants by percentage of revenue are Walgreens, 7-Eleven, and FedEx.

As for dividends, O recently reached Dividend Aristocrat status, with over 25 years of consecutive dividend increases.  O is currently announcing the majority of their annual dividend increase in January of each year, with smaller quarterly add-ons announced each quarter-ending month.  So, 5 dividend announcement per year.

O has never provided strong dividend growth (rather consistent dividend growth).  As one can see from the table below, dividend growth has resided between 4%-5% over each of the measurement periods.

Unfortunately, dividend growth in 2019 is trending below 3%.  However, this should not impact the long-term average if historical trends continue, as O has delivered less than 3% dividend growth for many single years, but still maintains steady longer-term dividend growth in that 4%-5% range.

 

With a REIT, I expect a larger yield in exchange for slower dividend growth and slow price appreciation.  Since I’ve been holding O, the yield has been good (currently 3.49%, but typically has yielded over 4%), the dividend growth is declining (currently <3%), but the price appreciation has exceeded expectations (especially over the past year).  As was the case with WPC in my last Performance Check, the price appreciation for O has certainly been helped by the low interest rate environment, allowing O to borrow at low rates and invest in new properties.

As you will see, O’s price appreciation has been a major factor with my performance.  However, my performance was also helped with a timely sale and a subsequent re-purchase at lower prices.

Note that O is a relatively new Portfolio position (only a few years), and thus I don’t have a large amount of data/time to factor into the return calculated in this Performance Check.  Therefore, for now, large price changes can have a significant impact on my annualized return.

 

My Personal Performance for O

Below is a capture of the spreadsheet I keep with my O cash flows, and the calculated XIRR.  Compared to my five legacy Portfolio holdings, the table for O is small, thanks to its shorter holding period and small number of transactions.

Here’s a note with regard to the possible ‘Type’ column entries: EOY Value = End Of Year Value, Dividend = a dividend that was not reinvested (a cash outflow)

The duplicate EOY Value entries at the end of each year (one negative, one positive) do not affect the cash flow, and can be thought of as boundary markers, allowing me to make the individual yearly return, and the annualized total return calculations.

 

 

I’ve been a bit more active with O in my Portfolio than some other stocks.  I made an initial purchase of 100 shares in mid 2015 at $46.41/share.  A little over a year later, I sold about two-thirds (66 shares) of that position after a decent run up in share price (sold at $70.35/share).  The sale was enough to return my original investment and leave me over 34 shares still invested (share total above 34 thanks to reinvested dividends).

O proceeded to decline in price shortly after my sale.  Its decline got me interested in building up my position again.  So, about 10 months after my sale, I was back to buying shares.  I bought 40 shares at a price of $55.59/share.  The stock price continued to fade into early 2018, and triggered another purchase on my part.  I then added 32 mores shares at a price of $49.64/share.  This proved to be very close to the low at that time.  These two purchases totaled 72 shares, recouping the 66 shares I sold.

The timely sale and subsequent timely purchases helped take what would have been a good return and supercharged it into a great return.

Since the early 2018 purchase, I’ve been holding and reinvesting my dividends.  The position has grown to nearly 124 shares.

 

The following price chart is also helpful to see.  It shows the stock price change since my initial purchase on 5/26/2015.  One can really see the outstanding price appreciation since May 2018 (the time of my last purchase).  My Year-To-Date return for O stands at 30.11%

 

The yield for O is currently 3.49% – above my Portfolio average of 2.66%, but that’s to be expected given that it’s a REIT.

O currently has an above-average value weighting in my Portfolio at 2.49% – my 18th largest position (out of 47 stocks).  However, its dividend weighting is 3.21% thanks to it relatively higher yield when compared to my other Portfolio stocks.

All O dividend payments I’ve received since my position was started have been reinvested.

My current investment in O is $5,391.99.  My cost basis, which includes $1,050.05 in reinvested dividends, is $6,442.04.

Meanwhile, the current value is $9,843.63, which reflects a potential capital gain of nearly $3,401.59 should I liquidate my entire position.  The annualized total return ends up being 28.16%, covering my initial purchase on 5/26/2015, through 10/19/2019.

 

Summary

I’d have to say that my returns with O have greatly exceeded my expectations over the 4+ years of owning the stock.  I could take 10% off the actual return of 28.16% and still be ecstatic.

O’s outstanding return for 2019 so far has boosted my already impressive annualized return by 2.5% (from 25.66% at the end of 2018 to the current 28.16%).  With interest rates still trending lower, perhaps O can continue to appreciated in price.  However, I expect some of the gains to be returned once we enter a rising interest rate environment again.  For that reason, I will consider trimming some O here, as I did in mid 2016.

 

Bringing the returns for my other Performance Check stocks (PG, RPM, AFL, PEP, JNJ, AL, GILD, TROW, FAST & WPC) up-to-date allows for the comparison below.

Note that rightmost column shows the year of my initial purchase for each stock, just to provide some detail with regard to how many years are part of the annualized return.

 

Given my lofty returns for O, it obviously debuts at #1 in terms of annualized return for my Portfolio stocks that I’ve reviewed.

Most stocks here regressed in their annualized return since my last Performance Check just one month ago.  However, Aflac (AFL) made a slight increase, while Fastenal (FAST) was up thanks to a strong recent earnings report, and WPC was up with the REIT sector in general.

Gilead Sciences (GILD) remains my poorest performer of the stocks reviewed (by a wide margin).  It drifted lower since last month and threatens to turn negative on me.  I could probably afford to move on from GILD and still have plenty of representation in biotech given my Abbvie (ABBV) and Johnson & Johnson (JNJ) holdings.

Minus GILD, I’m very happy with all the calculated annualized returns of the stocks I’ve reviewed thus far.

Looking forward, Gentex (GNTX) is on deck to be my next Performance Check stock.

 

Have you checked on the performance of any of your holdings recently?  If so, are you satisfied with the return you are getting?  Which companies stand out for you?