Shares of retailers Dollar General (DG 0.92%) and retail-focused real estate investment trust (REIT) Realty Income (O 4.25%) are both down materially over the past year. However, there’s a big difference between the businesses these two companies operate. That makes one of them a more attractive option than the other unless you like the risk and thrill of turnaround situations.
Realty Income’s problem isn’t its business
As a property-owning REIT, Realty Income’s business is pretty easy to understand. It owns buildings, roughly 75% of which are single-tenant retail assets, and leases them out. It is a net-lease REIT, which means that tenants are responsible for most property-level costs, like maintenance. Although having just one tenant per property means any single property is high risk, Realty Income’s portfolio of more than 13,000 properties means no single property is likely to be a big issue.
In the first half of 2023, Realty Income’s adjusted funds from operations (FFO), which is like earnings for an industrial concern, rose to $1.98 per share from $1.94 in the same period of 2022. That’s not impressive, but slow and steady is exactly what Realty Income is known for. For example, it has increased its monthly-pay dividend every year for 29 years, with a compound annual growth rate of 4.4% over that span.
There’s really nothing new here. Even the recent plan to buy peer Spirit Realty (SRC 4.35%) isn’t all that shocking given the previous acquisition of VEREIT and two large casino investments in recent years. This tortoise of a dividend stock just keeps plodding along. So why is the stock trading down 23% over the past year? The quick answer is rising interest rates, which make income alternatives (like CDs) more attractive and have investors worried about what are likely to be temporary headwinds on the business front. Eventually, the property market will adjust.
For long-term dividend investors, Realty Income’s decade-high dividend yield of 6.4% is likely a far more attractive choice than buying Dollar General.
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It is so bad that Dollar General rehired its old CEO
Dollar General’s problems are twofold. One piece of the problem is indeed the current business environment. For example, in the second quarter, the company noted that customers were buying more lower-margin consumables (think basics like deodorant) while shifting away from higher-margin products like clothing and decor, which aren’t necessity items. Earnings fell to $2.14 per share from $3 per share a year earlier. Essentially, Dollar General’s patrons are pulling back on excess spending. There’s not much the company can do about that.
However, that’s not the only problem the retailer faces. Notably, Bloomberg recently wrote an article calling Dollar General the “worst retail job in America.” That is something that can’t be easily fixed, and it speaks to a culture that is perhaps broken. Adding to the concern here was the company’s Oct. 12 decision to fire its CEO and bring back his predecessor.
While the new/old CEO might be able to turn things around, it will likely take some time. And there’s nothing he can do about the difficult retail environment, that’s just something the company will have to muddle through. But step back and think about what has just happened in the executive suite. The board of directors essentially flubbed the transition of power and is now attempting a “redo.” If you buy Dollar General you have to hope the next transition attempt works out much better.
All in all, there are good reasons for the stock being down more than 50% over the past year. This is a turnaround story, and only the most aggressive investors should get involved until there is actual evidence that things are improving.
Go with the boring story
Investing doesn’t need to be exciting, and in fact, it’s usually better if it isn’t. Dollar General and Realty Income are both retail-focused investments, but one has a much stronger business right now. If you want to sleep well at night, Realty Income is the far better option. That’s not to suggest that Dollar General can’t turn things around, but it is only at the very beginning of that process, and risk remains high. That’s just not the best option for most investors.