Western Asset Mortgage Capital’s CEO Invests Another $100K

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Western Asset Mortgage Capital (NYSE: WMC)’s CEO, James Gavin, bought almost 5,300 shares of the company’s stock on December 4 at an average price of $20.74 according to a Form 4 filed with the SEC.  Insider purchases are bullish signals and we think that this is because insiders should resist buying more shares of the company’s stock- preferring instead to diversify and invest in unrelated businesses- unless they have a strong expectation that the business will do better in the future. Of course, the CEO of a company likely also has more insight into how it will perform going forward. Our database of insider trading filings shows that Gavin had previously bought shares in May of this year at an average price of $18.68; the most recent filing shows that he owns a total of close to 16,000 shares, so this most recent purchase was a substantial increase in his holdings.

The company is a real estate investment trust which invests in residential and commercial mortgage-backed securities. Our records show fairly consistent insider buying at Western Asset Mortgage Capital Corp during 2012, including a number of purchases by a Board member in November. As might be expected for an REIT, the dividend yield is high- the two dividend payments since the May IPO (the stock is up 10% since that time) were of 38 cents and 85 cents, while the stock price is currently a bit above $20. Clearly the dividend payments are not consistent, but a quarterly payout of, say, 30 cents would give a yield of 6%. If 85 cents becomes a fairly regular quarterly payment, then the yield would be over 16%.

At a market capitalization of $500 million (the average daily volume over the last three months has been about 760,000 shares, so we wouldn’t be worried about liquidity), Western Asset Mortgage Capital Corp trades at less than half the book value of its equity. In comparison, larger REIT Annaly Capital Management (NYSE: NLY) trades at a P/B of 0.9, while Newcastle Investment (NYSE: NCT) and Redwood Trust (NYSE: RWT) are priced at a premium to book value. As REITs, these companies also offer high yields; Annaly and Newcastle seem to pay 10% or higher, at least going by recent payments, and all three have a longer operating history for what that is worth.

Billionaire Israel Englander’s Millennium Management came close to doubling its holdings of Western Asset during the third quarter of 2012, closing September with about 960,000 shares in the fund’s portfolio (check out Englander's favorite stocks). Fortress Investment Group initiated a position of 900,000 shares over the course of the quarter (see more stock picks from Fortress Investment Group).

Other popular picks for income investors include Altria (NYSE: MO), AT&T Inc. (T), and Verizon Communications Inc. (VZ). These stocks tend to pay dividend yields in the 5% range, which is lower than what would be expected from an REIT, although their businesses are likely more understandable and predictable. They are also very well capitalized- Altria is the only one of these three with a market cap less than $100 billion, and it is close to $70 billion by that metric. In addition, while Verizon and AT&T tend to have high trailing earnings multiples, Altria is priced at only 17 times trailing earnings and 14 times forward earnings estimates. Their yield probably wouldn’t be as high as that of Western Asset or its peers, but investors who are willing to give up some income in order to be more safely invested and in order to better understand the value of the underlying company might prefer these high-yield large-cap stocks. 


This article is written by Matt Doiron and edited by Meena Krishnamsetty. Meena has a long position in T. 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!

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