My previous article covered my surprise and the factors involved with the 30% dividend rate reduction announced by ARMOUR Residential REIT (ARR). As more third quarter dividend announcements have been posted, reductions have become the rule with payout cuts ranging from moderate to severe. I thought it would be useful to list the dividend changes for Q3 from the mortgage REIT companies and postulate a few opinions why this happened.
To provide some useful data, I will list the changes in dividend payments from Q2 to Q3, what has happened to the dividend over the last four quarters - since Q3, 2013 - and the share price change for the last 6 months, since that is the time frame since mortgage rates started the recent dramatic increase.
Here we go from large to small by market cap:
Annaly Capital Management, Inc. (NLY) Market cap: $11.3 billion
- Q3 Dividend: $0.35, down 5 cents or -12.5%
- 2012 Q3 dividend: $0.50. One-year change: -30%
- Six month share price (as of 9/20/13): -23.5%
American Capital Agency Corp (AGNC) Market cap: $9.2 billion
- Q3 Dividend: $0.80, down 25 cents or -23.8%
- 2012 Q3 dividend: $1.25. One-year change: -40%
- Six month share price (as of 9/20/13): -26.7%
Two Harbors Investment Corp. (TWO) Market cap: $3.6 billion
- Q3 Dividend: $0.28, down 3 cents or -9.7%
- 2012 Q3 dividend: $0.36. One-year change: -22.2%
- Six month share price (as of 9/20/13): -27.5%
- Note: TWO paid a larger than typical $0.55 dividend for Q4 of 2012
Invesco Mortgage Capital Inc (IVR) Market cap: $2.2 billion
- Q3 Dividend: $0.50, down 15 cents or -23.1%
- 2012 Q3 dividend: $0.65. One-year change: -23.1%
- Six month share price (as of 9/20/13): -24.5%
Hatteras Financial Corp. (HTS) Market cap: $1.9 billion
- Q3 Dividend: $0.55, down 15 cents or -21.4%
- 2012 Q3 dividend: $0.80. One-year change: -31.2%
- Six month share price (as of 9/20/13): -30.3%
ARMOUR Residential REIT Market cap: $1.5 billion
- Q3 Dividend: $0.15, down 6 cents or -28.6%
- 2012 Q3 dividend: $0.30. One-year change: -50%
- Six month share price (as of 9/20/13): -33.8%
CYS Investments, Inc. (CYS) Market cap: $1.4 billion
- Q3 Dividend: $0.34, no change from Q2
- 2012 Q3 dividend: $0.45. One-year change: -24.4%
- Six month share price (as of 9/20/13): -33.5%
- Note: CYS paid a $0.52 special dividend on top of the $0.40 regular dividend for Q4, 2012.
Capstead Mortgage Corp (CMO) Market cap: $1.2 billion
- Q3 Dividend: $0.31, no change from Q2
- 2012 Q3 dividend: $0.36. One-year change: -13.9%
- Six month share price (as of 9/20/13): -6.4%
Apollo Residential Mortgage (AMTG) Market cap: $500 million
- Q3 Dividend: $0.40, down 30 cents or -42.9%
- 2012 Q3 dividend: $0.85. One-year change: -52.9%
- Six month share price (as of 9/20/13): -30.1%
- Note: AMTG has a history of paying a lower dividend for the fourth quarter compared to the previous three.
Analysis and Thoughts
First off, kudos to Capstead Mortgage for managing its portfolio of agency ARM MBS to minimize the damage to shareholder values. It appears that the company's focus on short duration MBS is working out in this rising mortgage rate environment.
For the rest of the agency REIT bunch, the dividend cuts for Q3 were preceded by significant declines in the share prices of these stocks. Keep in mind that with a 25% share price drop, you need a 33% share value gain to get back to break even. Or using a common way to view the drop, it will take about 3-years worth of dividends to make up for the share losses, even longer after paying taxes on those distributions. Also, be aware that these companies cannot recover book and market share value through regular business operations. Only a decline in interest rates would cause share values to increase. Investors should not expect a share price recovery from the agency mREITs and investment decisions should be made on the prospects going forward from the current share values and dividend rates.
My hypothesis on the reason for the dividend cuts is that the mREITs have run out of capital gains from bond sales, which in previous quarters have been used to prop up dividends above the actual net interest earnings. I discussed the use of bond gains to pay dividends several times over the last 1 1/2 years, and that chicken has come home to roost. Way back in 2012, mREIT investors justified their acceptance of declining dividend payments by pointing out that book values were increasing. Now we are witnessing declining dividends and falling book values. Not a good combination for investment success.
Is it Time for Some Bottom Fishing?
With high-yield stocks, such as the agency mortgage REITs, there is always the hope that a corner has been turned and the results going forward will be positive. After what has happened over the last 6 months, my expectations are that the fourth quarter will contain more ugly and negative results. As these companies try to reconcile the 2013 full year results to the REIT requirements concerning REIT income payouts, it is very possible that dividends will drop again for the final quarter of the year.
If you think that the share values have bottomed for this sector and looking for a pick among the mREITs, note that back in June I turned moderately bullish on Annaly Capital Management and the relatively small 12% dividend reduction shows that Annaly is outperforming its peers in the current rate environment. Two Harbors Investment and CYS Investments also have done a better job of supporting the dividend rates. My personal time to buy trigger for the mREITs will be when the dividends actually stop falling and the quarterly earnings reports show increasing net interest income per share. That point is most likely at least a few more quarters into the future.