NRZ, 30% Upside On Raised Dividend

| About: New Residential (NRZ)

New Residential Investment Corp (NYSE:NRZ) is a REIT invested mainly in excess mortgage servicing rights, residential mortgage loans, and consumer loans. The company is a recent spinoff of Newcastle Investment (NCT).

On September 18th New Residential announced a quarterly dividend of 17.5 cents per share for the quarter ending September 30th, a 25% increase over the expected dividend of 14 cents. So what can we expect from the company's earnings for the same period? The company has already tipped its hand by announcing a raised dividend. We can expect good news from the company's earnings report.

The spinoff of New Residential was completed at the halfway point of their last quarter. As a result, last quarter's dividend was based on only half a quarter of independent operation. The dividend last quarter was 7 cents resulting in an expected full quarter dividend of 14 cents. When the company announced this dividend increase share immediately jumped 5%. However, as an REIT, a significant amount of the value that investors put on the shares is based on the dividend. So should we expect continued gains in the share price to match the gains of the dividend?

Before the spinoff Newcastle gave a presentation to investors about what to expect post-spin. In that presentation (found here) they cite an expected dividend of 61 cents per year. Annualizing the current dividend gives us 70 cents per year, yielding 10.0% . So clearly the company's investments are outperforming managements initial expectations.

So where are these surprise earnings coming from? In their most recent investor presentation from June the company gave an update on the performance of their investments. In that presentation we find that their excess MSR assets were returning 19% instead of the expected 17%. This is likely the largest contributing factor to the company's seemingly strong quarter.

Another interesting note from the pre-spin presentation is Newcastle's expectation for the share price of NRZ. As stated earlier the yield of a stock is a big factor of its value for REITs. Newcastle used its competitors yields as a comparison point to predict share price. They list Redwood Trust (NYSE:RWT), Home Loan Servicing Solutions (NASDAQ:HLSS), and PennyMac Mortgage (NYSE:PMT). These companies yield 6.2%, 7.5%, and 9.6% respectively giving an average yield of 7.8%. New Residential currently yields 10%. This yield premium is likely due to investor uncertainty given how young a company New Residential is. Given another quarter or two of stable or growing dividends I believe the yield will compress to come in line with its competitors. At its current dividend of 17.5 cents per share per quarter if New Residential yield comes down to its competitors average of 7.8% the share price of New Residential will be $8.97. This represents a gain of 30% over the current price of $6.90 as of writing.

Don't expect any bombshells at the company's earnings call on November 7th, the cat is out of the bag on their strong quarter already because of the dividend announcement. However, if the management can present a strong and stable plan to continue this growth I believe investor confidence will push the shares higher.

Disclosure: I am long NRZ, NCT. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.