The Federal Reserve's position to maintain low interest rates throughout 2014 is having a stabilizing effect on the financial markets. Big banks are meeting the Basel III requirements, the housing market is improving, and although the winter storms are not helping the construction efforts, the mortgage business is opening and closing applications like clock-work. Armour Residential REIT Inc (NYSE:ARR) is participating in the market, carving out its niche of operations and is very successful in the process.
ARR like many REITs took a beating with stock price depreciation when the Federal Reserve mentioned the work 'Tapering' in May, 2013. The word sent shock waves through the investor's world and most REITs and other mortgage companies saw their stock price drop approximately 30%. The REITs also dropped their dividends by nearly the same percentage, as many REITs still pay a double-digit dividend based on the current stock price. The real question for 2014 is if the REITs and mortgage companies, ARR in particular, are at the bottom and expect growth and prosperity in the future?
In the Q3, 2013 financial report the company reported a mixed bag of good and not-so-good news. The Core Income of $43.8 million, which is $0.11 per share. Estimated taxable REIT income of $3.8 million. Q3 2013 GAAP net loss of approximately $229.9 million or $0.63 per common share. Stockholders' equity as of September 30, 2013 was $2.2 billion or $5.26 per Common share. The third quarter of 2013 represented a period of disruptive volatility in the bond and mortgage markets.
In the Q4, 2013, ARR is expected to improve beyond the Q3's financial report. The Core Income is likely to surpass $45 million and the estimated taxable REIT income over $4 million. The GAAP net loss should be lower this quarter. The Q4 saw an improvement in the spread between long term and short term interest rates that will allow ARR more room for profitability.
ARR publishes a Monthly Company Update on their website. The highlights from the report showed the company repurchased 13 million shares in Q4, 2013, and 16 million shares for the year. The company hedged $16 billion (near 40%) of its assets and holds over $1.1 billion of unlevered equity between prepayment periods. ARR maintains cash and highly liquid Agency securities and does not trade in CMOs.
During the Q4, the Co-CEO, President & Secretary, Jeff Zimmer bought 10,000 shares at $3.74 on December 19, 2013. Scott Ulm, who is Co-CEO and CIO, bought 10,000 shares also at $3.74. Insider trading is often a sign that key leaders believe the current price is suppressed and anticipate a rebound in the stock price, and/or a solid dividend in the future. As of today's open (January 27, 2014) the stock price was $4.12 per share. A $0.38 stock price increase is a nice 10% gain in just a month.
On December 18, 2013, ARR announced the intent to pay $0.05 dividend for each month of 2014. Although this is not normally announced, it shows the determination of the company to provide stability for its investors. The company announced on January 6, 2014 the declared dividends of $0.05 for January, February and March 2014.
Through current market information, our analysis is that ARR and many mortgage companies are performing well over the last 3-6 months, and 2014 should continue profitable. There may be a late summer bonuses for investors if the company assesses its profit margin has grown and the $0.05 monthly dividend is not distributing sufficient funds to maintain a status of a REIT. I will pay close attention to the quarterly reports and watch for signs of a one-time dividend payment to meet this requirement.
Our assessment is the mortgage market as a whole, and specifically ARR, have found the bottom dip and have begun building positive traction in the Q4 reports. ARR has declared their quarterly dividend for the next 3 months which translates to a 14.5% return on investment. The stock price has rebounded well should maintain a price between $4.00 and $4.25 for the next 6 months. There are no over-bearing negatives in the market or concerning ARR. Investors should feel confident in a steady priced, solid-paying dividend stock like ARR. ARR is on my recommended list to buy and hold. Profit taking from the dividends is a worthy investment goal, while you can reinvest each dividend, or find the next double-digit investment opportunity.