I continue to be impressed with the performance and price action in shares of Javelin Mortgage Investment (JMI) since I first got behind the stock at the $11.00 mark. Shares of the company continue to perform swimmingly as they have surpassed my January 1, 2014 price target of $14.00 and are on their way to hitting my Q1 2014 price target of $15.00. The purpose of this article is to revise my price target for Q1 2014 on the back of yet another timely piece of good news from the company and comparisons to my three other largest mREIT holdings as it pertains to yield. I will also discuss what 2014 has in store for the dividends and what will power the stocks higher.
Javelin's Dividend - More Good News
JMI is simply outperforming most of the companies in the mREIT sector. The stock has surged past the $14.00 mark and is on its way to $15.00 after hitting a low in the mid-$10 range after it cut its dividend (from $0.23 monthly to $0.15). Why do I believe the stock is breaking out now? Because the street is recognizing that JMI can afford its dividend and has not cut since the summer of 2013, like so many of the mREIT competitors have (see sections below). Back in December, JMI announced its expected dividend policy for all of 2014 (Table 1). JMI at the time believed that it would pay $0.15 monthly for every month in 2014, or $1.80 on an annualized basis. At $14.15 a share, the stock is yielding 12.7% per share. What is important to note is that JMI could increase the amount of one or more of these announced dividends before the applicable record date or may declare supplemental dividends to meet the REIT tax requirement of paying out 90% of its taxable income to shareholders. At the same time cuts are also possible. In the current environment I do not anticipate cuts for the first half of 2014.
Table 1. Javelin Mortgage's Anticipated Dividend Schedule, 2014.
Shareholder of Record Date
January 15, 2014
January 30, 2014
February 14, 2014
February 27, 2014
March 17, 2104
March 28, 2104
April 15, 2014
April 29, 2014
May 15, 2014
May 29, 2014
June 16, 2014
June 27, 2014
July 15, 2014
July 30, 2014
August 15, 2014
August 29, 2014
September 15, 2014
September 29, 2014
October 15, 2014
October 30, 2014
November 17, 2014
November 26, 2014
December 15, 2014
December 30, 2014
Funds from operations are often a valuable metric to compare REITs. JMI's funds from operations have been trending higher every quarter since inception, peaking recently at $48,439,000 in Q2 2013. In Q3 2013, there was a decline to $11 million, but this was due to the company taking on its buyback policy and liquidating assets in July 2013 during the huge spike in interest rates. Despite this, the company had its best quarter on record with positive operating cash flow of $11.3 million. This was a strong piece of data. The funds from operations and cash flow for the year demonstrated the ability to cover its dividend. Table 1 referred to the expected dividends to be paid. Well, we learned today that there is indeed good news. The dividends for Q1 2014 have been confirmed by the company at $0.15 per month, or $0.45 for the quarter, which translates to a forward yield of 12.7%. Shares are up marginally on the news and drifting higher as I write. This news strengthens the thesis for Javelin. However, a comparison to my other top holdings in the mREIT sector is in order.
Annaly's Dividend - The Cuts Could be Over in 2014
Annaly Capital (NLY) has been through a lot of ups and downs of the stock market and seen its shares bounce up and down in the last two decades with moves in housing activity and mortgage values. The stock is really a survivor. I believe that investors are getting a bargain if they can acquire shares around the $9.50 mark. Still it could drift lower if the ten year treasury keeps pushing higher and stays over 3%. NLY can handle higher rates but it is the pace of the increases we need to be concerned with. Last month, NLY's dividend announcement revealed yet another cut to $0.30 down from the Q3 2013 dividend of $0.35. We know that NLY has to pay 90% of its taxable income to shareholders, but the company generally only gives us GAAP earnings. Taxable and GAAP earnings will typically differ due to items such as unrealized and realized gains and losses, differences in premium amortization and discount accretion, and non-deductible general and administrative expenses. It's frustrating to say the least.
What 2014 will bring is tough to predict accurately (did anyone REALLY see the bloodbath of 2013 coming) but I think most of the cuts are over. There could be a Q1 2014 cut to the dividend down to $0.27-$0.28 per share, but I think we are more likely to see the dividend be maintained at $0.30. The company's diversification is starting to pay off and I can elaborate more once the year-end report is in. The acquisition of CreXus was wise in my opinion. Further, the company has reduced leverage and increased hedging. While this cuts off upside potential for its earnings, the downside is limited. All in all, NLY is a good buy at these levels. At the current share price of $10.00, assuming the $0.30 dividend is maintained in Q1 2014, it will pay $1.20 annually or 12%. How about NLY's most recent funds from operations? NLY's most recent funds from operations were a big improvement. In Q2 2013, the company reported funds from operations of -$3,900,000,000, a major loss, but rebounded to roughly $795,000,000 in the most recent quarter, snapping three straight quarters of decline and losses.
American Capital Agency - Sliced and Diced the Dividend, But 2014 Could Be Better
My second largest holding in the space is American Capital Agency (AGNC). It was a rough 2013 accumulating this stock on the way down. I have a decent cost basis at $22.20 per share, but am in the hole. That said, the stock seems to have found a floor around the $19.50 level. I continue to have faith in Gary Kain and the management team at AGNC. As earnings have been hit along with book value, another cut came in Q4 2013. AGNC declared a cash dividend of $0.65 per share for Q4 2013 which was a cut of $0.15 or 19% from the last payout of $0.80. One thing it does have going for it that could help sustain the dividend going forward is its buyback policy. As of the end of Q3 2013, it had repurchased nearly 28 million shares of its common stock. That's over 7% of the float! The buyback reduces outstanding shares meaning existing taxable income can be spread among the remaining shares. This improves earnings per share and reduces the likelihood of a future cut. At $19.75 per share, assuming the $0.65 quarterly payout is maintained in 2014, the stock will pay $2.60 for the year, or 13.2%. This is much lower than what this stock usually paid us. In the most recent quarter (Q3 2013) for which data are available, AGNC's funds from operations were approximately $586,000,000. This was an increase of 72,000,000 from Q2 2013 but prior to this they had declined for four straight quarters. This turn-around was a good sign.
Western Asset Mortgage King Of The Yield Game But 2014 Is Anyone's Guess
In 2013, Western Asset Mortgage (WMC) made only one cut to its dividend taking it from $0.95 to $0.90 two quarters ago. At the end of the year WMC had made a surprise announcement. WMC declared a fourth quarter and year-end dividend of $2.35 for each common share payable in a combination of cash and stock. Shareholders got to make a choice of receiving their dividend in cash or stock. The expected cash portion of the dividend may be viewed as comparable to the company's regular quarterly dividend. Because the company was flush with cash and the law states shareholders have to get paid 90% of taxable income, this was done. The built up undistributed taxable income came from net gains realized on certain hedging transactions and the inability to offset such gains for federal income tax purposes with net capital losses realized on the sale of mortgage-backed securities.
While we do not know what the 2014 dividend will be, if we take the worst case scenario and assume that WMC will cut to $0.80 per quarter, or $3.20 annualized, the stock is still leading the pack over AGNC, NLY and even JMI when it comes to yield. Further, at $14.70 per share (it is only down so much from $17.00 because of that special dividend) it yields a whopping 21.7%. This is a yield we were once accustomed to with AGNC. What about its funds from operations? Well WMC has reported quarterly funds from operations that have consistently been in the black. Funds from operations have nearly tripled since 2012. Its most recent quarter was its best yet with $56,930,000 reported. While the price action in the stock is not as strong as JMI, and the dividend could come down in the future, for now it is winning the yield game. BUT, I still prefer JMI for my faith in its ability to sustain the dividend and its positive price action into 2014.
Conclusion: In 2014 Cuts Will Slow or Cease And a Price Target Raise For JMI
I'll keep it brief. JMI, AGNC, NLY and WMC are my largest mREIT holdings. WMC is leading the way in yield, but I'm not sure it can keep it going for all of 2014. Above 20% is just too high. I think a dividend yield of 15% is more reasonable at current price levels, but thus far management has pulled it off. I hope they continue to surprise. Funds from operations of all companies are trending higher now. Both AGNC and NLY's cuts are likely over, though one more in Q1 2014 cannot be ruled out. AGNC and NLY seem to have found their floor and still trade at a discount to book. They are decent buys at this time. And then there is JMI with another timely announcement, that yes, shareholders are definitely getting another $0.15 per month per share in Q1 2014. This is sending shares higher. With the momentum continuing and the likelihood of a strong Q4 2013 report, I am raising my price target to $15.50 at which point the stock will be fairly valued or trading at a slight premium to anticipated book value (as of December 31, 2013).