Realty Income (O) has just reported earnings and it has caught our attention today. We have discussed in great detail why you should strongly consider this darling monthly dividend paying REIT. That said, the name has been absolutely battered in the last few months:

Source: Yahoo Finance

As you can see, the stock has been creamed, which brought the yield to attractive levels. That said, with interest rate fears prevalent, and the likelihood of rates being raised 3 times in 2018, this stock is a bit risky. That risk is being baked into share prices, but we will also add that with this risk comes a strong history of dividends. Still, performance matters, even if it is considered to be the time to buy Reality Income. Let us discuss.

Top line

Revenue matters. It was up for the quarter and up for the year, which is a positive. Revenue for the quarter ended December 31, 2017 increased 8.0% to $310.7 million, as compared to $287.8 million for the same quarter in 2016. Revenue for 2017 increased 10.2% to $1.216 billion, as compared to $1.103 billion for 2016. This was in line with expectations. However, earnings were light.

Bottom line was light

Take heed, that the bottom line missed our expectations. Net income available to common stockholders for the quarter ended December 31, 2017 was $60.9 million, as compared to $85.7 million for the same quarter in 2016. Net income per share for the quarter ended December 31, 2017 was $0.22, as compared to $0.33 for the same quarter in 2016.

For the year, net income available to common stockholders for 2017 was $301.5 million, as compared to $288.5 million for 2016. Net income per share for 2017 was $1.10, as compared to $1.13 for 2016.

Net income and FFO per share in 2017 were impacted by a $42.4 million loss, equivalent to $0.15 per share, from the December 2017 early redemption of all $550.0 million outstanding 6.75% notes due August 2019.  Net income and FFO were also impacted by a $13.4 million non-cash redemption charge, equivalent to $0.05 per share, on the April 2017 redemption on the 6.625% Monthly Income Class F Preferred Stock.  While net income matters, what we care most about is the funds from operations which is a strong measure for dividend safety.

Funds from operations miss our expectations

FFO for the quarter ended December 31, 2017 decreased 14.4% to $171.0 million, as compared to $199.8 million for the same quarter in 2016. FFO per share for the quarter ended December 31, 2017 decreased 20.8% to $0.61, as compared to $0.77 for the same quarter in 2016. This was a miss of $0.03 versus our expectations. For the year, FFO increased 5.1% to $772.7 million, as compared to $735.4 million for 2016. FFO per share for 2017 decreased 2.1% to $2.82, as compared to $2.88 for 2016. Of course, we can make some adjustments to these figures, and we see that FFO was actually up. Adjusted FFO for 2017 increased 13.9% to $838.6 million, as compared to $736.4 million for 2016. AFFO per share for 2017 increased 6.3% to $3.06, as compared to $2.88 for 2016.

We love the dividend

The dividend is consistently raised, but we have to be cautious about it being able to be covered. We love the hikes, but we need coverage, so always watch the FFO as we discussed above. In January, Realty Income increased the amount of the annualized dividend to $2.628 per share, as compared to the February 2017 annualized dividend amount of $2.526 per share, which represents an increase of 4.0%. The new monthly dividend amount of $0.219 per share was paid on February 15, 2018 to shareholders of record on February 1, 2018. This will be raised again and again, rest assured.

Take home message

The stock has been clobbered, and could see more pressure on the back of rising rates. Ultimately, so long as the dividend is covered, buying on major dips and reinvesting the dividends for compound interest long-term is a winning strategy with this company.

Note: This article first appeared on our partner site, TalkMarkets.com

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