Obvious Value, Great Income

Terrific stocks often get ignored simply because there is nothing exciting about them, other than their total return potential. They're neither in hot industries nor fast growing. Why bother with mundane stocks like those? They can offer terrific returns with below average risk profiles. Real estate investment trust Kimco Realty is a perfect example of this type of play. Kimco is America's largest owner/operator of open-air shopping malls. That probably does not get traders' hearts racing. What might, though, is its 7.62% current yield. There are few places left which provide income that high without undue risk. Better still, Kimco is quite undervalued by historical standards. Evaluation of REITS uses price to funds from operations ratios (P/FFO) the same way regular companies use P/E ratios. Over the nine years since the start of 2010, KIM typically traded for about 15.1x FFO while yielding around 4.50%. As of Jan. 6, 2019 Kimco's P/FFO was extremely low, at just 9.8x forward estimates. That's a 35% discount to its average level. KIM's dividend yield was 7.62%, more than 69% above normal. Those valuations compare favorably with three of Kimco's four best buying opportunities (green-starred below). The lone exception, when KIM was cheaper than currently, came last April. KIM briefly touched 9.1x FFO along with an 8.48% dividend. Intrepid contrarians who bought then have seen 9-month, 11.4% gains, plus three 28-cent quarterly distributions. That equaled 17.72% in total return. We now have the next best chance to own KIM since the dark days of 2008-09, when Kimco was destined to recover from $6.30 to $18.40 in about 18-months. Conversely, Kimco's three should have sold moments (red-starred) each reflected clearly overpriced periods when P/FFOs were extended and yields were distinctly subpar. A simple regression-to-the-mean valuation reversion would support a 12-month target price of $22.65. This implies 12-month upside potential of 54% above and beyond the already attractive dividend yield. That goal is not only reasonable, it might prove to be overly conservative. Kimco's annual highs ranged from $25.10 to $32.20 during each of the five calendar years from 2013 through 2017 on fundamentals pretty similar to what is expected in 2019. Independent research from Morningstar is slightly less bullish on Kimco than I am, but they still like it very much. KIM has earned a 4-star, out of 5, buy recommendation from Morningstar. They see present day, as opposed to 12-months out, fair value as $17.70 per share. Achieving even that extremely modest goal would make for almost 28.5% in total return if it takes a year to play out. Long term prospects for KIM appear equally good. Value Line thinks FFO can gradually improve to about $1.85 by 2023, triggering a share price increase to between $30 and $40 per share by then. Note that the figures shown below were calculated from a starting price of $14.31. Total return prospects from Kimco's Jan. 6, 2019 level would be marginally lower. Kimco Realty is a solid, low-risk choice for virtually all investors right now. Buy some shares and put them away with a goal price range of $22 to $30 over the coming one to three years.

Obvious Value, Great Income

Kimco Realty is quite undervalued by historical standards.

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