Armour REIT Fortifies Its Dividend

 | Jun 13, 2013 | 1:30 PM EDT  | Comments
  • Comment
  • Print Print
  • Print
Stock quotes in this article:

arr

There have been some famous news headlines: Man Bites Dog, Dewey Defeats Truman. But one that really got my attention today was Armour Residential REIT's (ARR) announcement that it would maintain its monthly dividend.  

As predicted in my recent column, Armour announced this morning that its $0.07 dividend for the July-August period would remain unchanged. Remember that ARR announces dividends prospectively, so the third-quarter dividend forecast is also an earnings forecast. Armour's management is telling the market that all the dire forecasts for the mortgage-backed-securities market just aren't true.

I'm traveling in Europe, so I don't have all my spreadsheets in front of me, but suffice it to say, the six-week move in the stock price from the mid-$6 range to $4.59 Wednesday was not caused by a market perception that the dividend would be maintained. The market was pricing in a dividend cut of at least 30% -- and that did not happen.

The perception doesn't match reality, and lower prepayment speeds mean that ARR is building a war chest. Specifically, in its earnings release, ARR management noted that the company would have more than $15 million in undistributed taxable REIT income (TRI) at the end of the second quarter.

Mortgage REITs must pay at least 90% of TRI in the form of dividends to maintain their corporate-tax-free status. In reality, mREITs exist to pass through the entirety of their cash earnings. So, that "cushion," which amounts to be about $0.04 in distributable TRI per share, will eventually be disbursed. But keeping some on hand is not a terrible idea given the volatility in MBS pricing.

So, at Wednesday's close of $4.59, ARR yields 18.3% on the third-quarter's dividend rate. That's an attractive spread vs. a current 10-year Treasury rate of 2.2%, or the recent lows of 1.6%, or even a 10-year rate of 3%, 4% and so forth.

At some point, investors need to throw out the spreadsheets and just identify situations that are "out of whack," and an 18.3% yield in a near-zero interest rate world is truly out of whack. At Portfolio Guru LLC, we buy "out of whack" even when short-term market fluctuations hamper our near-term returns and when market sentiment sours on certain sectors. So we are buying ARR for clients at these depressed levels.

Columnist Conversations

While there a group of stocks that are the largest creators of news and headlines, one company gets fewer head...
After markets meet extensions of prior swings on the upside they are vulnerable to a deeper downside correctio...
Markets stage nice sell-off to begin trading week as S&P 500 2,000 continues to proves to be tough level t...
It's like somebody yelled fire in all three at the same time.

BEST IDEAS

REAL MONEY'S BEST IDEAS

Columnist Tweets

BROKERAGE PARTNERS

Except as otherwise indicated, quotes are delayed. Quotes delayed at least 20 minutes for all exchanges. Market Data provided by Interactive Data. Company fundamental data provided by Morningstar. Earnings and ratings provided by Zacks. Mutual fund data provided by Valueline. ETF data provided by Lipper. Powered and implemented by Interactive Data Managed Solutions.


TheStreet Ratings updates stock ratings daily. However, if no rating change occurs, the data on this page does not update. The data does update after 90 days if no rating change occurs within that time period.

IDC calculates the Market Cap for the basic symbol to include common shares only. Year-to-date mutual fund returns are calculated on a monthly basis by Value Line and posted mid-month.