Western Asset Stock Price Is At The Buy Point For This Quarter

| About: Western Asset (WMC)


WMC moved toward a hybrid REIT model that was less profitable, but much safer in the market place.

Another $2.35 dividend is less likely, but continued dividends near .60-.70 is anticipated.

Buy WMC now at the low point in the market.

2 Investing options to profit in WMC.

The best time to buy any high paying dividend stock is after the ex-dividend date. For a quarterly paying dividend stock like Western Asset Mortgage Capital Corporation (NYSE: WMC), the records show 7-30 days after the ex-dividend date is the low point to buy in. More on this later.

Western Asset is a solid mortgage REIT that is competing in a market full of competitors and hungry for capital investments. As a mortgage REIT, it must pay 90% of its taxable income to avoid the corporate taxes. This is a great savings to investors. WMC has been successful since beginning in 2012 and has consistently paid a double-digit dividend each quarter. WMC is recognized on several sites as a quality, high paying dividend stock. Visit the Dividend Channel for its current rating.

For the fourth quarter, 2013, the company paid a dividend of $2.35, but the earned dividend for that quarter was actually $0.916 per share and the difference was a catch-up amount the company had to pay to meet the REIT standards. REIT companies manage this information carefully and remain vigilant to ensure they meet this requirement. That is one of the main reasons the companies pay higher dividends.

"On May 8, 2014 reported its results for the first quarter ended March 31, 2014 (See the news release dated May 8, 2014). These results reflect the strategic decision by the Company to diversify its portfolio away from a pure Agency REIT and move toward a more "hybrid" REIT model. Actions taken by the Company in order to implement this strategy had a negative impact on both operating results for the period and book value as of March 31, 2014. The Company, which previously declared a $0.67 per share dividend for the quarter, recorded a GAAP net loss of $8.4 million, or $0.32 per basic and diluted share for the first quarter ended March 31, 2014. Core earnings for the period were $12.4 million, or $0.46 per basic and diluted share. Core earnings plus drop income for the first quarter was $15.2 million, or $0.56 per basic and diluted share. This amount is inclusive of estimated "catch-up" premium amortization for the period of $1.4 million or ($0.05) per basic and diluted share. The Company also reported a net book value of $14.19 per share as of March 31, 2014, but estimated that its book value as of May 5, 2014 was between $14.92 and $15.02 per share. That is an increase in the book value, which could represent increased value in the company."

Western Asset sold a total of 14.95 million shares and another 650 thousand shares in private placement (see the news release dated April 4, 2014 on the company website above). The company received approximately $220 million dollars total and has stated they plan to use the funds for investments and general operations. This increase in the number of stock shares will also dilute the dividend payout to some degree. We will monitor this over the next quarter.

Using WMC as a case study of investing, I will use its last two quarters to demonstrate. The stock price prior to the fourth quarter dividend going ex-dividend on the close of December 24, 2013, the stock price rose to a high of $17.48. On December 26, the stock price closed at $14.84, a drop of $2.64 after the $2.35 dividend. This is a model change in price and replicates where the price was expected to drop. Over the next month the low price was recorded on January 2, 2014 at $14.64. The stock price started a long steady climb toward $17.05 on March 19, 2014 just 5 days prior to the ex-dividend day for first quarter, 2014.

Due to the later announcement of the first quarterly financial report on May 8, 2014, the stock has continued down to a low on May 16 at $13.50, closing at $13.60. With the next dividend payment due in August, we are now seeing the low after the ex-dividend date and the release of the quarterly report. We could begin to see the beginning of the climb toward my anticipated price of $16 per share leading to the next dividend. Buying in now could provide an excellent opportunity for a profitable return.

Here are two options to grow your money with WMC.

Option 1. Buy the stock after the ex-dividend date at the low point. Hold the stock for the long term and enjoy the double digit dividends the company is paying. Had you have bought in January at near $15.00, and taken the $0.67 per share dividend, that would have created a 17.8% annualized return for yourself in the first quarter. If you would roll your dividends over, your purchase of additional stocks would be during the low point of the stock price, and you would again watch the stock price rise, and pay a strong, double digit dividend for you to enjoy.

Option 2. Buy the stock after the ex-dividend date at the low point. Hold the stock until the stock increases just prior to the ex-dividend date. Sell the stock between 5 days out and the day of the ex-dividend. At this point you don't have to be greedy, just find a nice sell point that has a good profit. The example in January to purchase at near $15.00 and sold at $16.75 (the high several days prior to the ex-dividend date was over $16.75), you would have earned $1.75 per share, which would equate to an 11.6% return for the quarter, or 46.6% annualized. Option 2 is more labor intensive as you, the investor must manage the timing of the buy and sell. However, the rewards are much greater.

Our recommendation is to buy now, during the low point and ride the stock price climb over the next 60-90 days. Either option pays well, but we recommend the buy and hold method, less stress and this helps to manage long-term income.

Disclosure: I am long WMC. 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.