Investing in Armour Residential (NYSE:ARR) is a risky task. Armour's share prices seem to be riding in a roller coaster. The stock makes surprisingly quick moves in both directions. It fell by almost 20% in the second week of October, but it bounced back as quickly as it plunged.
For this year, ARR was upbeat in the first few weeks and peaked at $7.19 on February 6. Since then, the stock started sliding down to as low as $6.24 on March 19. For the past few days, the stock slightly recovered. It is now trading around $6.50.
2012 was a turning point for ARR in terms of revenues that made a major jump from the previous year. The net income increased to $222.3 million. In 2012, ARR reported having total assets of $20.8 billion, up by an astounding 235%.
The sudden jump in a single year was the result of increased long term investments. While the total assets increased, the total liabilities also increased to $18.6 billion in 2012.
Nonetheless, the company still managed to post positive stockholder's equity at $2.3 billion. This is substantially higher than the $0.626 billion reported in the previous year. It also shows that the company has stepped up its investments in 2012 resulting in a notable increase in revenues. Consequently, ARR managed to obtain 15.15% return on equity.
Dividend Payout History
What sets ARR apart from most of its peers is its monthly dividend payout scheme. Month over month, the company has been consistently giving common stock dividend payouts to its shareholders since 2010. In 2011, the monthly dividends were $0.12 for the first three quarters of the year. But on the last quarter, the monthly dividends were reduced to $0.11. This amount was maintained on the first quarter of 2012.
In the second and third quarters, the amount was further cut to $0.1. A reduction was seen again in the fourth quarter to $0.09. For this fiscal year 2013, the dividend payout during the first three months was $0.08. In the latest dividend announcement of ARR, the company is set to give out $0.07 dividend per share for the months of April, May, and June.
While ARR regularly pays monthly dividends, the amount is declining. This negative growth in dividend payments ignited growing concerns among the shareholders and investors. If the declining trend goes on, then by the end of 2014 ARR may eventually stop giving out monthly dividends. Instead, the company may probably start reporting losses in the future unless the management does something about it.
mREIT Industry Overview and Outlook
In general, the REIT market is relatively volatile. It is uncertain and unpredictable as well. By nature, the market is cyclical and a major snag can cause havoc in the prices of real estate properties. In effect, REITs stocks will also be affected.
However, the housing market is upbeat since 2012. This is mainly driven by escalating demand amid low mortgage rates that are expected to linger on for awhile. This growth is also backed by a commitment from the Federal Reserve to keep the mortgage rates as low as possible.
Consequently, the housing market gets to enjoy increasing demand for housing triggered by low interest rates. Residential and mortgage REITs like ARR and Annaly Capital Management (NYSE:NLY) are expected to benefit from this.
But what lures many investors to mREITs is the regular income from dividends. The U.S. law regarding REITs suggests favorable tax rules to REITs as long as they pay out 90% of their taxable income via dividend. Therefore, the dividend history plays a significant role in the investors' decisions to buy, to sell, or to hold. REIT stocks are among the favorites of investors looking for income from dividends. This is on top of the possible earnings from price fluctuations.
Because of the volatility of mREIT stocks, investors should regularly monitor the prices. This is important, because market outlook and speculations can help investors estimate where the prices are headed to.
Armour Residential is not an attractive choice for risk averse investors as the stock is highly volatile. But for traders, the upward and downward movements provide excellent opportunities for gains. The volatility may also lead to possible losses.
In the past two years, ARR has seen an abrupt drop twice. But the rebounds were also quick. The latest was on November 14, 2012 when the share price closed at $6.09. This is equivalent to 7.58% drop from the previous closing price of $6.59. But on the following day the price quickly recovered to end at $6.41. It further rebounded on the next day to close at $6.75
This year, there were two major plunges in share prices. The first one was in mid-February; from $7.09 on February 13 to $6.52 on February 21. The latest major drop was on March 14, two days after the dividend payout. The price lost by 4.42% from $6.56 to $6.27.
At the current valuation, the stock is trading below the 200-day moving average and the 50-day moving average. The moving average convergence/divergence [MACD] of ARR shows a bullish run since March 27. While it is uncertain when the bullish trend will last, this gives hope for short ARR to hold or to buy while the trending is temporarily bullish.
For the long-term shareholders, the dividends look fine. The company generated an operating cash flow of $344 million in the last quarter, which is more than enough to pay $271 million in dividends. The company also has about $770 million in cash for to cover its short-term needs. The high leverage ratio and lower dividends are two of the serious concerns, but double-digit yield still looks appetizing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: Efsinvestment is a team of analysts. This article was written by one of our equity analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.