Why Insiders Are Buying This 13% Dividend Yielding mREIT
Adnan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I am bullish on AG Mortgage Investment Trust (NYSE: MITT) because I believe the stock has attractive relative valuations, as well as diverse asset mix that not only supports, but also enhances the company’s shareholder distribution, making an elevated dividend yield possible is an added advantage. The company’s MBS portfolio has low prepayment speeds combined with low coupon rates, making it an ideal asset portfolio under the given macroeconomic situation. In addition, insider buying makes me more bullish on the stock.
Company Description
AG Mortgage Investment Trust focuses on investing and managing a diversified portfolio of residential mortgage assets, particularly residential mortgage-backed securities, for which a US government sponsored agency guarantees payments of principal and interest. Additionally, the company expects to increase the proportion of non-Agency residential mortgage backed securities in its RMBS holdings with the passage of time. The company’s charter allows it to invest in other target assets, including commercial mortgage-backed securities, residential or commercial mortgage loans and asset backed securities.
MBS Holdings & Prepayment Speeds
Around 87% of the holdings of the company are composed up of Agency residential mortgage backed securities, while 10% are non-Agency RMBS followed by commercial residential mortgage backed securities holding around 3% of the entire assets portfolio. The company also owns a small portion (not more than 1% of the entire MBS portfolio) in Agency adjustable rate mortgages (ARMs). This diverse MBS portfolio allows the management to successfully navigate the company through these challenging times. This is why the stock appreciated around 22% in value during the prior year.
The weighted average coupon rate for the company’s MBS holdings is 4% at the end of the third quarter of 2012, compared to the weighted average coupon of 4.1%, 3.86%, and 3.54% for American Capital Agency (NASDAQ: AGNC), Annaly Capital Management (NYSE: NLY), and Armour Residential (NYSE: ARR), respectively.
The company’s Agency RMBS has a constant prepayment speed of 6.2% at the end of the third quarter. In comparison, MFA Financial (NYSE: MFA) reported a CPR of 21.6% for its Agency RMBS at the end of the third quarter of 2012. In contrast, American Capital and Armour Residential maintained CPRs of 12% and 13%, respectively.
Positive Insider Activity
AG Mortgage is one of the very few mortgage REITs with recent positive insider activity. On Jan. 1, 2013, 4 of the company’s directors purchased AG Mortgage’s shares at a price of $23.48, resulting in a transaction of over $37,000.
Elevated Dividend Distribution
The stock is currently offering an elevated dividend yield of 13%, backed by over 13% operating cash flow yield. The company recently announced a quarterly dividend of $0.8 for the fourth quarter of 2012. AG Mortgage paid a quarterly dividend of $0.77 per common share in the linked quarter.
The following chart displays the company’s history of increasing its quarterly dividends in a situation where most of the other mortgage RIETs are forced to cut their dividends. Annaly Capital decreased its quarterly dividend payment from $0.5 to $0.45, while Armour Residential’s monthly dividend decreased from $0.1 to $0.09.
Valuations
AG Mortgage trades at a 4% premium to its third quarter book value, compared with a 3% premium for Invesco Mortgage Capital. In comparison, Agency mortgage REITs, including American Capital Agency, Annaly Capital Management, and Armour Residential are trading at 5%, 11% and 12% discount, respectively.
equityfinancials has no position in any stocks mentioned. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!
