Investment In Armour Residential REIT Nets Profitable Double-Digit Gains

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 |  About: ARMOUR Residential REIT, Inc. (ARR)
by: Tom Dorsey

Summary

ARR confirms $0.05 for third quarter dividends.

Dividend over 14% and reinvesting dividends goes higher.

Core Income was strong in first quarter and positive through second quarter.

ARR expected to release second quarter financial report in August.

On July 3, 2014 ARMOUR Residential REIT, Inc. (NYSE: ARR) confirmed the third quarter, 2014 monthly cash dividends for the Company's Common Stock ($0.05) and Series A (ARR.PRA) ($0.171875) and Series B (ARR.PRB) ($0.1640625) Preferred Stock.

This follows the company's announcement 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 confirmed on January 6, 2014 the declared dividends of $0.05 for first quarter 2014, and on April 3 2014, the company confirmed dividends of $0.05 for second quarter 2014.

As of March 31, 2014 the company has 357,102,680 common shares outstanding with 2,180,572 shares of Series A Cumulative Redeemable Preferred, and 5,650,000 shares of Series B Cumulative Redeemable Preferred.

Reviewing the first quarter financial report posted on their website, several strong bullets stand out. Core Income and estimated taxable Real Estate Investment Trust ("REIT") income of approximately $58.3 million or $0.15 per common share, which represents a 12.28% return on stockholders' equity.

The Company distributes dividends based on its estimate of taxable earnings, not based on net income calculated in accordance with GAAP. Taxable REIT income and GAAP net income will generally differ primarily because of the non-taxable unrealized changes in the value of the Company's derivatives, which the Company uses as economic hedges, and other than temporary impairment of Agency Securities to be sold in later periods. These gains/losses on derivatives are included in GAAP net income, whereas valuation changes are not included in taxable income. Additionally, capital losses realized for tax purposes in first quarter 2014 will be carried forward to offset future capital gains.

Stockholders' equity as of March 31, 2014 was approximately $1.9 billion or $4.67 per Common share. Shares are trading at $4.25 as the open on July 14, 2014. The discount is due to the risk associated with interest rate risk, as when (not if) the Federal Reserve decides to allow the interest rates to rise can cause losses for companies borrowing huge amounts of money (like REITs).

There are some traditional investment firms (just look around the web) that are biased against REITs and other companies that pay high dividends. The measuring stick they use is the large corporation, blue chip stock that pays a 1-3% dividend and grows at 1-3% per year in stock price. They usually do OK, if 3-5% growth is acceptable during profitable years, and those stocks are less likely to lose as much during the down years in the market. If you are willing to conduct your research, you can grow your portfolio over 10% a year in the good years, and learn to protect your investments on the down side.

Investors often ask, 'How can I earn over 10% on my money?' Here is a simple review. Let us assume an investor purchases 1000 shares for the current price of $4.25, that would be a $4250 investment. The ex-dividend date for July 2014 is 11 July, so the investor would receive $50 on 30 July 2014. Each month as long as the company keeps paying the $0.05 as they stated in January the investor receives his dividend check. If you wanted to reinvest your dividends, the company would purchase additional shares each month on the pay date and the number of shares you own increase. The following month you own more shares to receive a higher dividend.

The growth on reinvesting will rise, because you will be purchasing more shares of stock each month. The current dividend yield is 14.1% ($0.05 x 12 months dividend by current stock price $4.25 = 14.1). If you reinvest your dividends, you will receive the same yield, but more shares of stocks pays more money in your dividend and allows you to increase the number of shares you purchase each month.

If you are retired and looking for a cash flow ARR is great for a monthly return. If you are still investing, ARR will provide a monthly dividend to reinvest and grow more shares in your portfolio. If each year your portfolio grows over 10%, you are doing well. Since 2008, your portfolio should be over 10% each year.

ARR is expected to release its second quarter financial report in August, 2014. We expect another profitable quarter with Core Income and estimated taxable Real Estate Investment Trust ("REIT") income near 55-60 million, similar to last quarter. With a per share return near 12-15%.

We recommend Armour Residential REIT Inc. as a buy and hold. Its value is in the monthly dividend payout and the opportunity is used for cash flow or to build your portfolio, the 14% yield is worthy of your time and effort.

Disclosure: The author is long ARR. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.