On July 29, 2014 Orchid Island Capital, Inc. (NYSE:ORC) released its quarterly report with some impressive results. I have been tracking Orchid Island for about 6 months and found it to be a profitable investment.
Some highlights in the report were a net income of $10.6 million, or $1.17 per common share. This is up from the first quarter report of $3.6 million, which was $0.71 per share. The company paid a monthly dividend of $0.18 per share, or $0.54 for the quarter, so we will watch closely over the next quarter or two for an increase in the dividend or a one-time catch up dividend.
The book value at the end of first quarter was $12.47, and as of June 30 is $13.05. That is a 4.6% gain for the quarter or 18.4% annualized. Investors owning this stock will likely see a stock appreciation as the current price is around $13.70. Orchid Island is trading at a premium due to the 15.7% annualized dividend return.
Orchid Island raised its dividend from $0.135 to $0.18 in December 2013. This demonstrates the dividend is not eroding the book value of the stock and we anticipate the dividend to remain the same, and may lead to a one-time increase or possible increase month after month. Any increase will probably go into effect during the fourth quarter of 2014.
Point of Concern
The company completed a secondary offering of 2 million shares in January, 2014. It conducted another offering of 3.7 million shares in March 2014. In June 2014, the company is under contract to sell up to $35 million worth of shares in the near future, with $6.9 million completed. Orchid Island Capital is attempting to grow quickly to match many of the other big REITs in the financial markets. This could be very profitable for the company, but investors need to be aware of the growth of the portfolio may or may not be as profitable per share.
As of June 30, 2014 the company had a net weighted borrowing rate of 6.3 to 1. With all the new shares it has sold to increase the cash reserves, the company has not had to borrow money to buy more investments. We like to see REITs stay under 8%, and Orchid Island is profitable at a lower rate. The company may decide to keep more cash on hand for the opportunities in the near to short term future.
The Federal Reserve has been reducing the amount of bonds it buys each month in the bond market and it is expected to stop in October 2014. The reduction of the buying of bonds has had a very little to no effect on the interest rates, because there is sufficient amount of capital in the market. When the money gets tight, there will be sufficient pressure to either increase inflation or encourage the Federal Reserve Board to raise interest rates.
When rates go up (and they will), Orchid Island and other companies in the financial markets will hit a readjustment period, but will come out the other side in a more profitable position. We could expect 1-2 quarters of adjustments, but the net spread for profits will be higher and allow dividends and the stock prices to increase.
Orchid Island had an excellent quarter, profitable for investors by paying a dividend of over 15%, an increase in book value and an increase in the stock price of about $1.00 per share since mid-May 2014, and we anticipate it to continue to grow based on the profit margin the company has established and the additional capital the company has invested through the cash flow of the additional sales of more stock. Third quarter is on track for a repeat performance, with growth in all three results.
With the additional cash from the three stock offerings and a profitable portfolio, the stock price is likely to track a similar course over the next 2 quarters, to earn near a dollar each quarter, and still pay the dividend. We anticipate the stock price tracking toward $15.00 by the end of the year, and if the dividend remains the same, this may force the company to provide a one-time catch-up dividend in late fourth quarter, and a book value closing in on $15.00 as well.
We recommend Orchid Island Capital as a buy and hold for the strong monthly dividend. The book value growth and stock price appreciation are two benefits for investors. Taking the cash each quarter can provide an excellent cash machine, but some investors may want to reinvest the dividends to grow even more into the future. Either method is an investment opportunity.
Disclosure: The author is long ORC. 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.