Best Time To Buy Western Asset Mortgage Capital

| About: Western Asset (WMC)

Over the last 2 quarters the REITs have adjusted their holdings and continue to be profitable and many companies pay a double digit return through their dividend. Western Asset Mortgage Capital Corp (NYSE:WMC) paid an exceptional dividend of $2.35 (based on an average stock price in December, 2013 of $16.00, the yield was 14.7%, for that one quarterly dividend). If you include the three previous dividends of $0.95, $0.90 and $0.90 the total dividend for 2013 was $5.10. Using the same December, 2013 price for comparison, the dividend yield for the year was 31.8%. The 2 questions investors pose is: Will the stock price drop, stay the same or appreciate? Will the dividend drop, stay the same or increase? The answer lies in the company operations and the market. We can look at both.

The website states:

Western Asset Mortgage Capital Corporation's focus is on investing in, financing, and managing primarily residential mortgage-backed securities (RMBS). Although our core investment strategy will be focused on Agency RMBS, we may opportunistically supplement our portfolio with RMBS that are not guaranteed by a U.S. Government agency or U.S. Government-sponsored entity, or non-Agency RMBS, commercial mortgage-backed securities and other asset-backed securities. Our goal is to provide attractive risk-adjusted returns to our investors over the long term across market conditions and economic cycles.

Western Asset and many other REITs took a hit in their stock price when the Chairman of the Federal Reserve, back in May, 2013, mentioned the intent to begin reducing the purchases of bonds each month. Although there was no immediate reduction in the purchases, the market reacted violently, but selling off REITs and other mortgage related stocks and depressed the stock prices by about 30% for the year. The last 6 months the REITs have stabilized their stock prices and dividends remain in the 10-15% for most REITS. We expect the stock price to range from $14.00 to $20.00 throughout 2014. Western Asset remains the highest paying REIT, well over the average. Some analysts are expecting a better 2014 for REITs and the mortgage markets.

The company announced the dividend for 4Q, 2013, of $2.35 that will be paid in cash and stock (on January 28, 2014) in order for the Company to reduce its undistributed taxable income from 2013 and satisfy the REIT distribution requirements.

One question many investors asked was why Western Asset paid such a high dividend for 4 quarter, 2013. The answer is simple. Western Asset is a REIT and by law, to keep their tax-status as a REIT, must pay out at least 90% of the sum of its taxable income. For the first three quarters they paid $2.75 ($0.95, $0.90 and $0.90 respectively), and during the fourth quarter had to pay out the remainder or the company would not meet this requirement.

Can Western Asset continue to pay this dividend? No. Western Asset had an excellent year, but the quarterly dividend will probably return to near the same dividend of the previous three quarters (estimate $1.00 a quarter if no major changes in the market). Even at $1.00 dividend per quarter this is a great return. At the current stock price of $14.70, that would be a return of 6.8% per quarter, or 27.2% annualized. If the company has another good year, we could expect the fourth quarter dividend to balloon again. There is always the chance negative events could happen in the market and the company not pay any dividend, however, that is less likely.

The largest risk by investing in Western Asset is the risk of interest rate changes. Western Asset, like most other REITs leverage their portfolios by borrowing money short term to finance long term. The Chairman of the Federal Reserve has already stated their intent to keep interest rates low of all of 2014, so we can assess a less chance of interest rate change, which provides more stability for companies planning throughout the year.

Western Asset is a smaller mid-size company with a market cap of $358 million and 24 million outstanding shares. In comparison of 2 other REITs, American Capital Agency Corp (NASDAQ:AGNC) has a market cap of $7.757 billion and 377 million outstanding shares, while ARMOUR Residential REIT Inc (NYSE:ARR) has a market cap of 1.513 billion and 370 million shares. Western Asset announced during its 4th quarterly release and its estimated book value per share, as of November 30, 2013, was approximately $16.76. The stock is currently priced at $14.70, so the stock is traded at a discount. With the excellent dividend return, we consider this a good value.

Western Asset Mortgage Capital Corp is a strong buy at this time for continued success in the current market. One area to highlight for investors is to reinvest dividends automatically would create an additional profit. The ex-dividend date was December 24, 2013 and the stock price opened at $17.41. If you bought the stock that day, that was the high in the build up to receive the dividend. If you use the automatic reinvestment option, you would receive your $2.35 on the pay date of January 28, 2014. Based on today's current stock price of $14.70, you would receive more shares because the price is lower now.

The other obvious, but often unstated, bit of information is when investors review stocks that pay strong dividends, the stock price drops after the ex-date and for the first 30 days remains at its lowest point, and then begins a trend upward as it gets closer to the dividend date. The most expensive time to buy the stock is leading up to the dividend date, where the price is bid higher by investors trying to buy the stock, get the dividend and get out before the stock drops. Our advice is to find quality stocks that pay a good dividend, like Western Asset.

We assess Western Asset as a Buy and buy now at the low point of the stock price. Ride the price up to get the dividend. We do not recommend that most investors should try to buy and sell, trying to time the market. As long as Western Asset continues to pay these dividends, build your position at the low point. If you are using the stock as a cash cow, enjoy the quarterly returns.

Disclosure: I am long WMC, AGNC, ARR, . 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.

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