Seeking Alpha
Profile| Send Message|
( followers)  

By Siraj Sarwar

Armour Residential (NYSE:ARR) is one of the most popular mortgage-backed real estate investment trusts in the market. The mREIT invests primarily in hybrid adjustable and flexible rate residential mortgage-backed securities. The company is externally advised and managed by Armour Residential Management LLC. As an mREIT the stock has been paying substantial dividends. In this article, I look at the company's distributions and on its financial position to discuss the dividend sustainability. I also look at the share repurchase program announced in the last quarter.

Dividends

For the first quarter of 2013, Armour declared a cash dividend of $0.08 per outstanding share of common stock for each month. Looking at the company's past dividend history can be helpful in judging whether the latest dividend is expected to continue. I believe the company will increase its dividends after Q1 of 2013. The company has an average 3 year revenue growth rate of 30.9% along with healthy margins.

REITs keep a special place in the hearts and minds of dividend investors, because they give out at least 90 percent of their taxable income to protect their tax status. Armour Residential is named as a Leading 10 Real Estate Investment Trust [REIT], according to Dividend Channel.

Portfolio

As of the end of September, the Company's portfolio consisted of Freddie Mac, Fannie Mae and Ginnie Mae mortgage securities. The company's portfolio was valued at $22.1 billion. The company portfolio of Agency Securities consisted of 10.8% ARMs and Hybrid ARMs and 89.2% fixed rate Agency Securities. Armour's businesses are safe and have huge growth prospects. During the Q3 of 2012, the annualized yield on the company assets was 2.70%, and the annualized cost of funds on average liabilities stands at 0.89%. It means the company has a sufficient net interest spread of 1.82%.

Armour shares display both strong profitability metrics and attractive valuation metrics. For instance, the company share price of $6.87 represents a P/B ratio of 0.9 and dividend yield of 17.03%. On the other hand, the average stock among REITs yields 3.9% and trades at P/B ratio of 1.9. Furthermore, the company has strong monthly dividend history together with multi-year growth rates in essential fundamental data metrics.

However, it is worth to mention that ARR's leverage ratio is among the highest in the industry. The company financed its portfolio with around $19.8 billion of borrowings under repurchase agreements. It is highly leveraged as the debt to equity ratio stands at 8.93 to 1. In addition, the debt-to-total shareholder equity ratio also stands at a level of 8.12 to 1.

Repurchase Program

The company's Board of Directors has authorized the repurchase program of $100 million of its outstanding shares. The Company also announced that it will purchase shares in the open market including block trades. The company has sufficient cash in its cash flows to meet business obligations and buybacks. Armor buybacks decision perfectly captures the key elements of Warren Buffet 1999 letter to Berkshire Hathaway shareholders. The company has sufficient cash, and its stock is trading below its intrinsic value.

Buybacks are very important for investors and stockholders. Shares repurchase program offers several benefits. Share repurchases further drive down its valuation like price-earnings ratio. Low price-to-earnings ratio means that a company is not as much expensive than it was prior to the buyback. As far as stockholders concerns, buybacks can hike the price of stock by increasing demand. Buyback also helps the company to increase its dividends.

Competition

ARR

NYMT

P/B

0.9

1,5

P/S

0.6

8.3

P/E

8.9

3.6

Dividend yield

17.03

15.92

Debt/Equity

-

Rev Growth%

30.9

0.0

Operating margin%

67.4

57.3

Net margin%

67.4

54.2

Source: Morningstar.com

One of Armour Residential's competitors is New York Mortgage Trust (NASDAQ:NYMT). Both companies are trading at attractive multiples at present. At the moment, Armour is trading at a discount compared to peers group. However, I believe Armour Residential and New York Mortgage Trust are comparatively small, have sound valuations, and are reasonably comparable. Armour is currently selling at around $6.87 per share, and New York Mortgage Trust is not that far from the $7 mark. Both companies have forward price-to-earnings ratio slightly over 6, whopping dividend yields of around 17% and 16%.

Summary

Armour has the highest net interest spread over its competitors'. It has net interest spread of 1.82%. The company's charter permits the management to contain non-Agency securities in the MBS portfolio. Furthermore, Armour's MBS portfolio has small prepayment risk as calculated by its CPR of 13%.

The company owns shorter length securities with lower average coupon of 3.54%. Lower coupons are relatively in safer condition from the Fed's QE3. While the leverage risk is pretty high, Armour is a nifty pick for dividends investors. Its dividends are big and safe, and the company fundamental metrics indicates its sustainability.

Source: Armour Residential: Strong Dividends Set To Continue