Up to date on June twenty eighth, 2021 by Bob Ciura
ARMOUR Residential REIT Inc. (ARR) is a mortgage Actual Property Funding Belief (mREIT) that gives an interesting 10.4% dividend yield, making it a excessive dividend inventory.
ARMOUR Residential additionally pays its dividends on a month-to-month foundation, which is uncommon because the overwhelming majority of corporations that pay a dividend, pay them quarterly or semi-annually.
There are presently solely 52 month-to-month dividend shares in our protection universe. You possibly can obtain our full checklist of month-to-month dividend shares (together with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the hyperlink beneath:
ARMOUR Residential’s excessive dividend yield and month-to-month dividend funds make it an intriguing inventory for dividend buyers, despite the fact that its dividend funds have been declining through the years.
As with many high-dividend shares yielding over 10%, the sustainability of the dividend is in query. This text will analyze the funding prospects of ARMOUR Residential.
As an mREIT, ARMOUR Residential invests in residential mortgage backed securities that embrace U.S. Authorities-sponsored entities (GSE) similar to Fannie Mae, Freddie Mac. It additionally consists of Ginnie Mae, the Authorities Nationwide Mortgage Administration’s issued or assured securities backed by fastened price, hybrid adjustable price, and adjustable price residence loans.
It additionally consists of unsecured notes and bonds issued by the GSE and the USA treasuries, cash market devices, in addition to non-GSE or authorities company backed securities.
The mortgage REIT was based in 2008 and is predicated in Vero Seashore, Florida. It seeks to create shareholder worth via cautious funding and danger administration practices that produce present yield and superior risk-adjusted returns over the long-term.
With a market cap of roughly $800 million and ~$150 million in annual income, it’s a vital nationwide participant in residential funding.
Supply: Investor presentation
The belief makes cash by elevating capital via issuing debt in addition to most well-liked and customary fairness, after which reinvesting the proceeds into higher-yielding debt devices.
The unfold (i.e., the distinction between the price of capital and the return on capital) is then largely returned to widespread shareholders by way of dividend funds, although the belief typically retains just a little little bit of the earnings to reinvest within the enterprise.
Latest outcomes at ARMOUR have been combined. The belief was severely impacted by the COVID-19 pandemic, however was capable of meet all of its margin calls and it maintained entry to repurchase financing.
ARMOUR reported 2021 first-quarter outcomes on April 21st, 2021. The belief’s liquidity together with money and unencumbered securities amounted to $687 million with $12.40 in e-book worth per widespread share at quarter-end. Core revenue fell from $0.32 per share in Q4 2020 to $0.23 per share within the 2021 first quarter.
ARMOUR additionally reported debt–to–fairness ratio of 4.2–to–1 in contrast with 4.8–to–1 at March thirtieth. Its securities portfolio included $7.7 billion of company MBS and consists of TBA securities. In the meantime, complete revenue stood at $29.1 million, representing 12% annualized return based mostly on stockholder’s fairness firstly of the quarter.
Wanting forward, decrease short-term rates of interest may assist the enterprise revenue margins as they will now borrow funds at cheaper charges and use the proceeds to repurchase most well-liked and customary fairness shares at a reduction to the costs they have been issued at.
Supply: Investor Presentation
Of late, a shrinking stability sheet and declining spreads have crimped the belief’s capability to provide money circulate. That being stated, the financial disruption attributable to the coronavirus outbreak has disrupted the enterprise mannequin, main to a pointy decline in money circulate per share,in addition to a steep dividend reduce.
Transferring ahead, we count on the low curiosity price setting and heavy authorities stimulus to enable the corporate to renew progress, although it’ll probably take a whereas for them to rebuild to earlier ranges of e-book worth and earnings energy.
Whereas there have definitely been some constructive developments at work for ARMOUR, there are nonetheless a number of dangers to be involved about. ARMOUR’s high quality metrics have been unstable given the efficiency of the belief as charges have moved round over the years. Gross margins have moved down since quick–time period charges started to rise meaningfully a few years in the past, though it seems most of that harm has been performed.
Stability sheet leverage had been moving down barely,however it noticed an uptick once more this previous quarter. Nevertheless, we don’t forecast a vital motion in both path from this level. Curiosity protection has declined with spreads but additionally seems to have stabilized, so we’re considerably optimistic transferring ahead, whereas preserving in thoughts the numerous potential for volatility.
ARMOUR is going through headwinds from the coronavirus outbreak and an total financial downturn. Consequently, a steep dividend reduce was essential to protect the stability sheet and permit the REIT to reposition itself for survival and future progress.
On the present stage, the annualized dividend payout of $1.20 per share will characterize almost all the corporate’s EPS (we estimate 2021 EPS of $1.22), leading to a payout ratio close to 100%. This can be a purple flag that the dividend may very well be prone to an extra discount, if EPS have been to fall.
For example, if the financial system have been to enter recession, mortgage defaults may surge, resulting in steep losses. With the unsure macroeconomic outlook, this danger is related for buyers.
ARMOUR Residential’s excessive dividend yield and month-to-month dividend funds make it stand out to excessive yield dividend buyers. Nevertheless, we stay cautious on the inventory particularly in mild of the a number of dividend cuts lately.
Whereas the belief is overlaying its dividend presently, declining rates of interest may proceed to pressure the belief ever additional out on the danger spectrum to take care of its money flows as its older mortgages roll off the stability sheet. This units it up for doubtlessly steep losses if the financial system have been to slide right into a recession.
Due to this fact, ARMOUR inventory carries notably increased ranges of danger. This makes the funding extremely speculative proper now, particularly for risk-averse revenue buyers similar to retirees. Consequently, we encourage risk-averse buyers to look elsewhere for sustainable and rising revenue.
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