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Summary

  • Orchid pays $0.18 per month dividend for 16% return.
  • Orchid book value dropped 1Q, 2014 $0.93 to $12.47.
  • Hedging Investments pulled bottom line down.
  • Recommend finding best price to buy in, then hold for long-term cash flow.

Orchid Island Capital, Inc. (NYSE:ORC) invests in residential mortgage-backed securities, that are guaranteed by Fannie Mae and Freddie Mac. Orchid is managed by Bimini Advisors, LLC, an SEC-registered investment advisor and subsidiary of Bimini Capital Management, Inc. (OTCQB:BMNM), which - like Orchid Island - is a publicly-traded REIT.

On May 1, 2014 Orchid Island announced results of operations for the first quarter ending March 31, 2014. The highlights included:

  • Net income of $3.6 million, or $0.71 per common share
  • First quarter total dividend payments of $0.54 per common share ($0.18 per month)
  • Book Value per Share of $12.47 at March 31, 2014

The net book value per common share price is down $0.93 to $12.47, compared to end of year 2013 at $13.40. This is a near 7% drop in the book value which investors will watch with concern.

The first-quarter report was released on May 1, and as of June 2 the stock will open at $12.95. The good news is the market is driving the stock price above the book value, however, if the book value erodes through the rest of 2014, the stock price and possibly the dividend is like to erode also.

The company has just over 9 million shares outstanding. The 52-week high and low has been from $14.40-$10.02. The value of the statement above refers to all net proceeds from the sale of additional shares were reinvested. Other companies sometimes use the money for current operating expenses, which could show weakness in their cash flow. I see this as a positive position and the additional shares should not drag the return to investors down based on this sale of shares where it increased the size of the portfolio.

On May 8, 2014 Orchid announced a monthly cash dividend for the month of May 2014. The dividend of $0.18 per share will be paid May 30, 2014, to holders of record on May 27, 2014, with an ex-dividend date of May 22, 2014.

One of the strong positives I found is over the last 6 months the dividends (December 2013-May 2014), have been $0.18, up from $0.135, which was paid from March 2013 through November 2013. The dividend yield annualized is 16.7%, based on dividend and June 2 open of $12.95. The company would not have increased the dividend from $0.135 to the current had it not have had the funds and the requirement of paying out to maintain its REIT status.

In the quarterly statement the company shows a loss in its current hedging investments, but does not include it in the GAAP, which allow the loss to be taken in the current earnings statement. Many REITs are hedging investments against the next increase in interest rates that will push the market down. In the first-quarter statement the company discusses its risk management strategy.

"In connection with its interest rate risk management strategy, the company economically hedges a portion of the cost of its repurchase agreement funding by entering into derivative financial instrument contracts. The company has not elected hedging treatment under GAAP, and as such, all gains or losses on these instruments are reflected in earnings for all periods presented. As of March 31, 2014, such instruments were comprised of Eurodollar futures contracts with an average contract notional amount of $400.0 million and a weighted average fixed LIBOR rate of 2.01%, and an interest rate swaption agreement, giving the company the option to enter into a pay fixed interest rate swap ("payer swaption")."

The intent is to maintain profits now, but buffering investments with the ability to react quickly in the market to avoid the huge drop once interest rates begin to rise. Orchid, like many other REITs, has management strategies to create the right mix of investments and options to move forward.

Our evaluation of Orchid Island Capital, Inc. is an investment opportunity that pays a strong dividend, but has not settled its portfolio sufficiently to demonstrate a good position to buy in. Our concern is the book value may adjust downward a bit further through 2014 until the company establishes earnings that support the dividend and steadies each quarterly financial report. The current portfolio investments look sound and we anticipate Orchid to become another double-digit paying dividend stock into the future. We recommend a buy and hold for this stock, however, the stock price may not be near the best buy in price. Investors who buy in now could still get a 10% or better dividend return.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I plan to watch ORC over the summer before I decide to purchase. The dividend is nice, but I will watch the stock price. 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.