This article will discuss the recent cuts and hikes in Capstead Mortgage and some of its closest peers in the mortgage REITs sector. Also, a brief analysis of the dividend sustainability for these mREITs is provided.
Capstead Mortgage Corporation (NYSE: CMO) has a market cap of $1.24 billion and operates as a self managed real estate investment trust. The company owns a leveraged portfolio of residential mortgage backed securities, which are exclusively Agency adjustable-rate mortgage [ARMs]. Capstead uses short-term financing (repurchase agreements) to finance its asset portfolio. The company has an objective of providing its investors elevated returns in the form of both stock price appreciation and high dividends.
Capstead Dividend Hikes
Capstead recently declared a quarterly dividend of $0.31 per share for the first quarter of the current year. This is a 3.3% increase from its previous quarter's dividend distribution. This increase signals the company's healthy performance during the current challenging times, particularly when the Fed is committed to keeping the interest rates at their lowest. It also reflects the fact that the company generates enough cash flow from its operations to sustain its dividends. Its past four quarter cash dividend coverage ratio is 1.53 times, while it's most recent quarter's cash dividend coverage ratio came out to be 1.72 times.
In contrast, Armour Residential (NYSE: ARR) declared a monthly dividend of $0.07 for the first quarter of the current year compared to $0.08 per share for the fourth quarter of 2012. This is a sequential decrease of 12.5%. Armour Residential's past four quarter cash dividend coverage ratio is 1.18 times. Therefore, Armour has less margin to cover its quarterly dividends from its regular operations, compared to Capstead.
Annaly Capital Management (NYSE: NLY) was forced to decrease its quarterly dividends twice during the previous year. Its most recent quarter's cash dividend coverage ratio comes out to be 0.7 times. Therefore, I believe Annaly's investors can expect a dividend decline for the first quarter of the current year. American Capital Agency (NYSE: AGNC), a similar pure play mortgage REIT, maintained its dividends during the previous year. Its past four quarter cash dividend coverage ratio comes out to be 1.7 times, while its most recent quarter's cash dividend coverage ratio was 1.5 times. American Capital's ratios make me believe that its investors can expect the current dividend rate to continue.
Recent Quarter's Performance
At the end of the fourth quarter, Capstead reported an EPS of $35.1 million or $0.31 per share. During the quarter, the net interest rate spread declined 17 bps to 1.13%. During the same time, the book value decreased $0.3 to $13.58 per share. The company repurchased $42 million worth of common shares through January 2013, while its operating costs as a percentage of average long-term investment capital decreased 9 bps to 0.79%. At the end of the most recent quarter, Capstead reported a CPR of 19.6% compared to 18.7% at the end of the linked quarter.
In comparison, Annaly Capital Management reported a 7 bps decline in its net interest rate spread. The interest income decreased 60 bps, while its bottom line of $700.5 million climbed two folds over the linked quarter. Unrealized gain and losses on interest rate swaps and net losses on extinguishment of Convertible Senior Debt were considered to be the reason for the sequential surge.
In contrast, American Capital Agency was able to increase its fourth quarter net interest rate spread by 21 bps. American Capital reported a net income of $570 million, up 9.6% from the linked quarter. A $353 million gain on sale of MBS further supported the fourth quarter bottom line. The bottom line, which came it at $810 million increased several times from the linked quarter's bottom line of $86 million.
While Capstead Mortgage and American Capital Agency have the financial muscle to continue their dividend distribution in the coming quarters, I believe you can expect a further decline in Annaly Capital's dividends. Therefore, I recommend investors invest in Capstead and American Capital.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: The article has been written by Equity Whisper's Financials Analyst. Equity Whisper is not receiving compensation for it (other than from Seeking Alpha). Equity Whisper has no business relationship with any company whose stock is mentioned in this article.