Every so often an investor comes across two stocks that are both high-quality performers and also pay solid dividends. Then the most difficult part is figuring out which one is the better buy.
This is especially true with real estate investment trusts (REITs) within the same subsector. Two REITs may have many similarities, and it really takes some due diligence to decide which is the superior stock.
Take a look at two retail REITs, both of which have excellent track records. But one fares slightly better in an extremely close competition.
National Retail Properties Inc. NNN is a net-lease REIT that owns a diversified group of stand-alone retail outlets across the U.S. National Retail Properties has a very stable tenant base with names like 7-Eleven, Sunoco, Best Buy, Camping World, BJ's Wholesale Club and Chuck E. Cheese.
Realty Income Corp. O, which bills itself as The Monthly Dividend Company, also owns and operates retail properties under long-term net-lease contracts. Its tenants are large, well-known companies like Walgreens, 7-Eleven, CVS, Lowe’s, Dollar General, FedEx and Walmart.
Size and Diversity:
National Retail Properties has a total portfolio consisting of 3,349 properties across 48 states. Its properties are 99.4% occupied with an average lease term of 10.4 years.
Realty Income owns over 11,700 commercial properties across 50 states, Puerto Rico, the U.K. and Spain. Its most recent tenant occupancy rate was 98.9%.
The advantage goes to Realty Income, which has a much larger portfolio in more states and a diversity of international properties as well.
Performance Over Time
In long-term performance since 1995, National Retail Properties has a total return, including nonreinvested dividends, of 612.12% or 7.43% annually, while Realty Income’s total return is 1,271.56%, or 9.82% annually. Over the last five years, Realty Income also holds a 7.07% to 5.46% edge in total return.
But over the past 52 weeks, National Retail Properties has had a total return of 5.85%, while Realty Income’s total return was 0.61%. Shorter time frames of one and four months also slightly favor National Retail Properties. This category is a draw, with Realty Income the superior performer over longer time periods, and National Retail Properties outperforming more recently.
Dividend Yield
National Retail Properties pays an annual dividend of $2.20, for a present yield of 4.77%. Realty Income pays an annual dividend of $2.982 for a present yield of 4.62%. The edge goes to National Retail Properties, although the yields are close.
Dividend Growth and Stability
National Retail Properties has raised its dividends for over 33 consecutive years. Over the past five years, National Retail Properties has grown its quarterly dividend from $0.475 to $0.55, with the annual dividend increasing from $1.90 to $2.20. This is an increase of 15.7%.
During that same time frame, Realty Income has grown its monthly paid dividend from $0.2063 to $0.2482, with the annual dividend increasing from $2.475 to $2.982, an increase of 20.4%. Neither company has suspended or cut its dividend over the past five years.
Realty Income is one of only 65 S&P 500 Dividend Aristocrats because it has declared 630 consecutive monthly dividends and increased its dividend 118 times since its initial public offering (IPO) in 1994. In addition, it pays its dividend on a monthly basis, which is advantageous for income investors. The difference in growth is significant. A clear edge for Realty Income.
Dividend Coverage by FFO
National Retail Properties has forward funds from operations (FFO) of $3.12 and an annual dividend of $2.20, for a payout ratio of 70.5%. Realty Income has a forward FFO of $4.01 and pays $2.982 in annual dividends, for a payout ratio of 74%. The lower payout ratio gives a slight edge to National Retail Properties.
FFO Multiple (Price/FFO)
National Retail Properties has an FFO multiple (P/FFO) of 14.77, while Realty Income has an FFO multiple (P/FFO) of 16.13. The lower multiple gives the edge in this category to National Retail Properties.
Debt Ratio
National Retail Properties has total debt of $5.55 billion, and its debt-to-equity ratio is 73.93. Realty Income’s total debt is $16.89 billion but its debt-to-equity ratio is 62.88. Owning far more properties gives Realty Income higher debt, but the significantly lower debt ratio means Realty Income wins this category.
Most Recent Operating Results
Both companies achieved solid third-quarter operating results.
National Retail Properties’ third-quarter FFO was $0.79 per share, up 11.2% from $0.71 per share in the third quarter of 2021. Revenue of $193.47 million was up 7.2% from $180.36 million in the third quarter of 2021.
Realty Income had a third-quarter FFO of $0.98, up 15.2% from $0.85 in the third quarter of 2021. Revenue of $837.3 million was up 73.1% from $462.33 million in the third quarter of 2021. The better year-over-year results give a clear edge to Realty Income.
Summary
National Retail Properties holds the advantage in the categories of dividend yield, dividend coverage by FFO and FFO multiple.
Realty Income has the edge in size and diversity, dividend growth and stability, debt ratio and most recent operating results. Performance over time was basically a draw, with National Retail Properties doing better in the shorter time frames and Realty Income outperforming over the long term.
National Retail Properties holds an advantage in three categories, while Realty Income was superior in four categories, and there was one tie.
These two retail REITs are both high quality, and the competition was fairly close, but the slightly better stock overall is Realty Income.
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