The Pennies Are Adding Up for This Mortgage-Related Dividend Payer

Last week and this week bring a smattering of housing data, which will give investors a far better sense as to how that part of the domestic economy is recovering as it looks to put the Covid-19 pandemic further in the rear-view mirror. Following the Federal Reserve's barrage of monetary stimulus measures, mortgage rates hit multiyear lows in late May and have inched only mildly higher in recent weeks. In normal times, the prevailing thought would be that the Fed's interest rate stimulus would spur the housing market along as well as entice businesses to invest and consumers to spend. Based on the recently released May reports for housing starts and existing home sales, the quick reaction would be those measures have yet to kick in. May housing starts in total rose 4.3% month over month to a seasonally adjusted annual rate (SAAR) of 974,000 units. That's far below the 1.6 million SAAR rate from January and February, but it suggests housing starts may have bottomed out in April, when they hit 934,000 on a SAAR basis. However, digging into the meat of the May housing starts report, we find single-family housing starts were unchanged compared to April's 674,000 units, again on a SAAR basis. This means the month-over-month rebound was almost exclusively in multifamily housing. Alongside the housing starts data, we learned May building permits jumped to 1.22 million on a SAAR basis, which was meaningfully higher than 1.066 million rate in April. The issue with building permits is they are not necessarily tied to a firm order and are viewed more as an indication of interest. That said, the market tends to view rising building permits as a positive indicator of future activity. Meanwhile, May existing home sales came in at SAAR of 3.91 million, missing the consensus view and falling almost 10% compared to April. Interestingly, the months' supply of homes for sale hit 4.8, remaining well below normal level of 6.0 months. This helps explain why residential brokerage company Redfin commented in late May and again earlier this month that it saw a rebound in home-buying demand due in part to massive migration of people moving out of large cities as a result of the pandemic and urban anxiety. Backing up Redfin's comments, the Mortgage Bankers Association Builder Application Survey data for May showed mortgage applications for new home purchases increased 10.9% versus year-ago levels and jumped 26% compared to April 2020. We could hunt for income-paying homebuilders, but the recent growth in mortgage demand led PennyMac Mortgage Investment Trust to boost its quarterly dividend to $0.40 a share, up 60% from the prior $0.25 a share. PennyMac is a specialty finance company that primarily invests in residential mortgage loans and mortgage-related asstes. The company's core business is its correspondent production segment that serves as an intermediary between mortgage lenders and the capital markets by purchasing, pooling and reselling newly originated prime credit quality mortgage loans. It stands to reason that as the volume of new quality mortgages increases, so too will PennyMac's correspondent production business, which in 2019 accounted for 73% of the company's income before taxes. Thinking about PennyMac's big dividend increase, we should note the company's new annual dividend expense is all of $160 million. That compares to the $1.1 billion in cash on the company's books exiting the March 2020 quarter, which offers ample dividend coverage. At its current share price and with its new dividend, PennyMac sports an annual yield near 9.6%. The first quarterly dividend at this new level will be paid July 30 to shareholders of record July 15.

The Pennies Are Adding Up for This Mortgage-Related Dividend Payer

PennyMac Mortgage Investment Trust recently boosted its dividend in a big way as post-lockdown mortgage demand begins to pick up.

Columnist Conversation

This Weekend on Real Money

Friday Morning Fibocall for 10/22/2021

10-Year Note Yields

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.