- Investors will profit from ARRs buy backs through stock appreciation and dividends.
- Look for a fall bonus dividend to maintain the company's REIT status.
- Annual dividend yield of 14%.
ARMOUR Residential REIT, Inc. (ARR) announced on March 6, 2014 another increase in the stock repurchase authorization of up to 50 million shares of common stock. The average volume for ARMOUR Residential REIT has been 5,280,400 shares per day over the past 30 days, which is sufficient to execute the repurchase plan without affecting the supply and demand in the market.
ARMOUR Residential REIT Inc. invests mainly in hybrid adjustable rate, adjustable rate and fixed rate residential mortgage backed securities issued or guaranteed by a U.S. Government Sponsored Enterprises (GSEs). During the Spring of 2013, the Federal Reserve Board Chairman announced the tapering by the Federal Reserve to reduce their purchasing of Bonds each month the market jitters drove stock prices of REITs and other companies in the mortgage community down about 30%. Since the 4Q, 2013 the mortgage market has stabilized and the companies have shown new life in some appreciation in stock prices and profitability. ARR has been one of the stronger companies during this recovery.
Since January 2014, the new chairwoman of the Federal Reserve (Janet Yellen) has taken the leadership position and her first order of business has been to steady the markets and continue holding interest rates down while continuing to purchase fewer bonds each month. The stability in the market is good and companies like ARR continue to make money and display profitability.
The company also has access capital that the board assesses is best served by purchasing their own company shares and hold as Treasury shares. The board believes (as we do) these shares will appreciate over time.
ARR will also have the ability to increase the dividend to the share holders based on their income and less outstanding share holders to pay. To describe this opportunity I will use January 2014 as an example. There were 357 million shares and the payout in dividend was $0.05 per share or about $17.85 million dollars. If the company buys 50 million shares then there are only 307 million shares, to divide the $17.85 million dollars. That would equate to $0.058 per share (or extra $0.008 per month), and over the next 9 months would accumulate to about $0.072 extra per share. If the company continues to pay the $0.05 per share, at some point they will have to increase the dividend. We will assume a one-time payout of a hefty bonus dividend, and hold steady on their $0.05 per month dividend payout for the year.
With the repurchase and holding these shares in the Treasury, the board of directors have the ability to sell these treasury shares at the appropriate time in the market. This would give the company the ability to raise capital quickly for use in the market. With the 13 million shares they reported purchased last year and more this year, ARR is sitting on a hefty bank roll able to jump on opportunities as they present themselves.
Shares are up 7.5% year-to-date as of the open of trading on Tuesday, March 11, 2014 at $4.27. The company's current return on equity increased when compared to its ROE from the same quarter one year prior. This is a signal of strength within the corporation. In comparison to the other companies in the Real Estate Investment Trusts (REITs) industry and the overall market, ARR's return on equity exceeds that of the industry average and is above the average of the S&P 500.
Our recommendation is to hold or increase your holdings of ARR. The annual and quarterly reports continue to show profitability and the company is paying dividends in excess of 14%. We see the company paying a catch-up dividend sometime in the fall as they execute a profitable year and need to increase their dividend to maintain their REIT status.