This Is Not A Dividend Cut, Get It Right
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I recently read an article on Seeking Alpha saying, "Chimera (NYSE: CIM) cuts its dividend again, what should investors do now?" In summary, the article says the company has cut its dividend twice in the last six months and has more risk than other REITs. The article goes on to suggest, the company's non-agency securities, which are 70% of the portfolio, make Chimera too risky, even with the potentially higher dividend yield. The writer specifically assumed that the companies dividend of $0.09 per-share would be the equivalent dividend going forward. There's one major problem with the premise of this article, and that is the company did not cut its dividend, it simply adjusted its payout based on its earnings.
Understanding a REIT, requires the investor to know that dividends will not be the same as with other stocks. A REIT is required to distribute 90% of its earnings, in order to maintain its tax advantaged status. Because of this factor, saying that a REIT cut its dividend is technically inaccurate. Since all REITs pay dividends based on expected income, if their income changes their dividend changes. There should be no assumption of consistency. The writer compared Chimera to another company in the same industry, Hatteras Financial (NYSE: HTS). In theory, since Hatteras invests primarily in agency securities, which are guaranteed by a government agency, the stock should allow investors to capture a high-yield with less risk. Looking at analyst estimates for Chimera versus competitors, it seems investors would do well to reconsider the risk that the company supposedly represents.
In fact, if there is any risk to Chimera currently, it is the fact that the company has not filed their 10-K statement yet. This delay is due to Chimera examining how to classify some of its investments to meet with GAAP standards. Investors should take heart in two pronouncements by the company in the last six months, that say the exact same thing. In each announcement, Chimera said that, "dividend distributions are based on taxable income and the results of this analysis will have no impact on the company's prior or future dividend distributions." Additionally, in the company's March 1 filing, Chimera announced that this review would result in a, "non-cash charge in accounting results, but it would not affect the companies previously announced: book value, cash flow, dividends, and taxable income." Given that Chimera is managed by a team from the well respected Annaly Capital Management (NYSE: NLY), investors should probably be willing to give the company the benefit of the doubt.
When you compare the three companies mentioned, Hatteras, Annaly, and Chimera, the estimated yield of each stock might surprise some investors. Look at the following table, to get an idea of how each company is leveraged, as well as to see what type of dividend investors should expect for this year:
|
Name |
Total Liabilities to Total Assets |
EPS Estimate |
Estimated Dividend (90% of EPS) |
Effective Yield |
|
Annaly |
86.75% |
$1.90 |
$1.71 |
10.10% |
|
Chimera |
65.47% |
$0.46 |
$0.41 |
17.30% |
|
Hatteras |
86.75% |
$3.66 |
$3.29 |
11.29% |
You can clearly see that Chimera carries less liabilities compared to total assets. This lower leverage is a risk avoidance factor in owning non-agency securities. If the company is able to meet its EPS estimate for the year, Chimera's dividend yield should be significantly higher than either of its two competitors. Even if you assume, as the Seeking Alpha writer did, that the dividend will continue at $0.09 per quarter, the companies dividend yield would still be over 15%. Compared to 10% and 11% for Annaly and Hatteras respectively, it seems Chimera's higher yield more than compensates investors for this perceived greater risk.
The bottom line is, while Chimera does carry more risk because of the type of securities in its portfolio, the companies higher potential dividend yield, and lower leverage should give investors confidence. Understanding the way that REIT investments work, is critical to understanding the risk versus reward of buying these shares. With the Federal Reserve expected to keep short-term interest rates low for the foreseeable future, all three companies could be a good buy. To single out Chimera as riskier and thus less attractive, seems ill-informed and shortsighted. With the stock selling for about 78% of the company's last reported book value ($3.03), this could be a good entry point for investors.
MHenage owns shares of Chimera Investment, Hatteras Financial, and Annaly Capital Management. 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.If you have questions about this post or the Fool’s blog network, click here for information.
