Armour Residential (NYSE:ARR) released its first quarter 2013 earnings on May 2. There were mixed reactions among the shareholders and the investors. There are some aspects where the performance is good. But if taken from a different angle, the performance is different and poor.
In the end, the negative outlook prevailed, leading to a slight fall in ARR share price. ARR shares fell by 1.7% from $6.47 the previous day to $6.36. Armour Residential took another blow on the following trading day as shares further fell to $6.32. All in all, ARR shed 2.31% within 2 days after the release of its quarterly earnings report.
One of the major highlights of the report is the estimated taxable REIT income of about $86 million. This represents 13.8% of the firm's annualized yield for the quarter. The first quarter REIT income is 80.6% higher than the REIT income of the same period in 2012 at $47.6 million. But compared to the previous quarter, the REIT income is down by 4.8% from $90.3 million.
The GAAP income of $102.3 million and the core income of $67.5 million also saw growth versus the year-ago quarter. Last year's same quarter performances were $65.2 million and $41.3 million, respectively. But just like the REIT income, the above data is down compared to the previous quarter. The fourth quarter GAAP and core income were $115.8 million and $69.8 million, respectively.
For the first quarter, Armour Residential paid a monthly dividend of $0.08 per share. However, this will be decreased to $0.07 dividend per share in the second quarter. While ARR religiously pays dividend payouts every month to all shareholders for the past few years, the amount is decreasing.
The first quarter 2013 dividend amount saw a negative growth of 27%. It is down from $0.11 per share it paid out for the first three months of last year. ARR further reduced the payout amount to $0.10 per share in the second and in the third quarters of 2012. Another round of reduction was seen in the fourth quarter at $0.09 per share.
Many traders invested in ARR because of its dividends. But with the payout amount continuously declining since 2010, more shareholders are selling off. This is probably one of the reasons why the share price never fully recovered. Before the financial crash in 2009, ARR generally traded above the $9 price level. The last time the price hit $9 per share was on November 19, 2009. Since then, shares plummeted towards $6 per share and lower. While there were occasional rebounds toward $7.5 per share, the highest bounce never reached $8 in 52 weeks.
An important metric of the financial is the book value. ARR's book value at $6.69 fell short of the estimated range of $6.70 to $6.76. This is down by 8.3% from the book value of $7.29 it reported for the 4th quarter of 2012. However, Armour Residential REIT is not the only agency mREIT with declining book value. Its peers, the Invesco Mortgage Capital (NYSE:IVR) and American Capital Agency (NASDAQ:AGNC), also encountered the same fate.
The current book value of ARR is slightly higher than its current share price. This may be interpreted that the present trading level of ARR is aligned with the present worth of the company. With this outlook, ARR may never hit the $7 share price level for the entire second quarter. But if Q2 of 2013 ends with increasing book value, then, perhaps, the shares will follow too.
Share Performance for 2013
Armour Residential REIT was upbeat at the start of the year and closed at $6.78 per share on January 2. For most of January, shares were trending upward and hit the 2013 ceiling at $7.14 on February 6. Since then, the mood took a shift from upbeat to downbeat. ARR hit the $6 price level on February 14 and stayed within this level to-date.
There are many probable causes for the downbeat trend of Armour Residential REIT. One of them is the industry-wide outlook of REIT stocks. While they are generally high-yielding stocks, they are extremely high risk as well. The market outlook of residential properties is still heavily affected by the recent global financial crisis.
Many investors are still afraid to invest in the housing market that triggered the worldwide financial fall down. However, there were measures in place to attract more people to invest in real estate properties. The Federal Reserve committed to minimize as much as possible the mortgage rates.
Despite that, ARR remains down amid better 1st quarter financial performance versus the same period of last year. But sequential comparison will make ARR's performance against Q4 2012 look poor. This is further coupled by shrinking dividend payout. Perhaps this explained why ARR shares fell right after the Q1 of 2013 earnings report was released. It triggered a minor sell-off. But smart investors look at it as an opportunity to buy at reduced price.
Bargain hunters looking for the right dividend stocks welcome the recent slight fall of ARR shares as a good sign. It provides an excellent chance for investment while the price is cheap. For as long as the company pays dividends month-over-month, the loss in shares can be offset by the dividend payout. And when ARR bounces back, additional gains will be added to their portfolio.
Majority of the analyst firms in Yahoo and in Nasdaq share the same view. Neither of the analyst firms recommended a sell nor voted for underperform. The consensus of the majority is a hold, while some advised for a buy and a strong buy. In fact, Nasdaq's one-year price target range for ARR is from $6.50 to $8.25 per share.
Yahoo Finance, on the other hand, has the same price target range for ARR. The mean target is $6.97 while the median target is $7 per share. There is high chance that ARR will reach even the median target of $7 per share. This is backed by the industry's positive market outlook fueled by minimized mortgage rate imposed by the Federal Reserve.
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.