Kimco Realty (NYSE:KIM) has had a rough three months with its share price down 20%. But if you pay close attention, you might find that its key financial indicators look quite decent, which could mean that the stock could potentially rise in the long-term given how markets usually reward more resilient long-term fundamentals. In this article, we decided to focus on Kimco Realty’s ROE.
Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.
Check out our latest analysis for Kimco Realty
How Is ROE Calculated?
Return on equity can be calculated by using the formula:
Return on Equity = Net Profit (from continuing operations) ÷ Shareholders’ Equity
So, based on the above formula, the ROE for Kimco Realty is:
9.2% = US$944m ÷ US$10b (Based on the trailing twelve months to March 2022).
The ‘return’ is the income the business earned over the last year. So, this means that for every $1 of its shareholder’s investments, the company generates a profit of $0.09.
What Is The Relationship Between ROE And Earnings Growth?
Thus far, we have learned that ROE measures how efficiently a company is generating its profits. Based on how much of its profits the company chooses to reinvest or “retain”, we are then able to evaluate a company’s future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don’t have the same features.
Kimco Realty’s Earnings Growth And 9.2% ROE
On the face of it, Kimco Realty’s ROE is not much to talk about. However, the fact that the company’s ROE is higher than the average industry ROE of 6.5%, is definitely interesting. Particularly, the substantial 25% net income growth seen by Kimco Realty over the past five years is impressive . That being said, the company does have a slightly low ROE to begin with, just that it is higher than the industry average. So, there might well be other reasons for the earnings to grow. Such as- high earnings retention or the company belonging to a high growth industry.
As a next step, we compared Kimco Realty’s net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 11%.
NYSE:KIM Past Earnings Growth July 17th 2022
Earnings growth is a huge factor in stock valuation. It’s important for an investor to know whether the market has priced in the company’s expected earnings growth (or decline). By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. What is KIM worth today? The intrinsic value infographic in our free research report helps visualize whether KIM is currently mispriced by the market.
Is Kimco Realty Using Its Retained Earnings Effectively?
Kimco Realty has a very high three-year median payout ratio of 79%. This means that it has only 21% of its income left to reinvest into its business. However, it’s not unusual to see a REIT with such a high payout ratio mainly due to statutory requirements. Regardless, this hasn’t hampered its ability to grow as we saw earlier.
Besides, Kimco Realty has been paying dividends for at least ten years or more. This shows that the company is committed to sharing profits with its shareholders. Existing analyst estimates suggest that the company’s future payout ratio is expected to drop to 51% over the next three years. However, Kimco Realty’s future ROE is expected to decline to 4.5% despite the expected decline in its payout ratio. We infer that there could be other factors that could be steering the foreseen decline in the company’s ROE.
Conclusion
On the whole, we do feel that Kimco Realty has some positive attributes. Specifically, its respectable ROE which likely led to the considerable growth in earnings. Yet, the company is retaining a small portion of its profits. Which means that the company has been able to grow its earnings in spite of it, so that’s not too bad. That being so, according to the latest industry analyst forecasts, the company’s earnings are expected to shrink in the future. To know more about the company’s future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.
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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.