Insider Buying At This 17% 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.
Note: A previous version of this article inaccurately stated Western Asset Mortgage Capital's stock price relative to its book value. The error has been corrected.
Western Asset Mortgage Capital (NYSE: WMC) has been named top dividend stock with insider buying last month in an article on Forbes. Paid in quarterly installments, the company distributes $3.60 per share. This article aims to explore the sustainability of the company's mouthwatering dividend yield of over 16% and find other reasons to invest.
Company Description
Western Asset Mortgage Capital is a relatively old company. It elected to be taxed as a REIT commencing December 31, 2012. The company is hybrid REIT since it has investments in residential mortgage backed securities, asset backed securities and commercial mortgage backed securities. Besides, the company's RMBS are composed of both Agency and non-Agency MBS.
Recent Insider Buying
According to the company's latest disclosures, Western Asset's CFO doubled its stakes in the company. CFO Steven Sherwyn purchased over 10k shares at $21.31 price. This insider buying is encouraging for the company's shareholders as it reflects the CFO's confidence in the company's future. The CFO is expecting the stock price to appreciate on the growth potential he sees. In another recent insider buying, Western Asset's CEO purchased over 5k shares at a price of $20.74 per share in December 2012.
Dividends
The stock offers a dividend yield of 16.6%, when the 10-year Treasury is offering 1.88%. The company does not have a long track record of dividends. However, according to the most recent quarterly SEC filing, the company generated $21 million in cash from operations and paid of $3.9 million. This way the company's cash dividend coverage ratio for the third quarter of the prior year comes out to be 5.4 times. This means the company has sufficient financial muscle to continue an elevated dividend distribution in the coming quarters.
Competition
Western Asset competes with other hybrid mortgage REITs including Invesco Mortgage Capital (NYSE: IVR) and American Capital Mortgage (NASDAQ: MTGE). Invesco has an MBS portfolio with Agency RMBS, non-Agency RMBS and commercial mortgage backed securities. Around 69% of the portfolio is Agency RMBS, followed by non-Agency RMBS at 17% and CMBS at 11%. Within the Agency MBS, the company has a large concentration in the 30-year fixed rate paper, which accounts for over 75% of the Agency RMBS held. This is followed by 17% of 15-year fixed rate Agency paper. Therefore, the company offers a diverse MBS mix which is why it reported only a 2 bps decline in its fourth quarter net interest rate spread.
American Capital Mortgage is a similar hybrid mortgage REIT that is invested in both Agency and non-Agency residential mortgage backed securities. 90% of the company's recent quarter end MBS were Agency RMBS. Among the Agency MBS, the company has a large concentration in the 30-year fixed rate MBS, which are 63% of the entire Agency portfolio. This is followed by 15-year fixed rate securities at 35% of the entire Agency MBS.
Valuations
Western Asset is currently trading in line with some of its closest peers. The stock is trading at a moderate 5% premium to its book value.
Conclusion
I am bullish on Western Asset Mortgage Capital. The stock offers an elevated dividend yield that I believe is sustainable. Besides, the stock has attractive relative valuations compared to its peers. Further, the management's bullish stance represented by its recent insider buying, support my stance. Therefore, I recommend investors looking for regular income invest in the stock.
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