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Summary

  • Insiders buying again, Spring of 2014 and Fall of 2013.
  • Strong quarterly dividend expected for Q3 2014.
  • Expect a bonus dividend for the catch up in Q4 2014.

Reported on SEC Form 4, President and CEO of Western Asset Mortgage Capital Corp (NYSE: WMC) Gavin L. James bought 16,060 shares on August 15, 2014 at an average price of $14.69. The total transaction amount was $235,921.

Mr James also bought 11,350 shares of WMC stock in April 2014, and 1000 shares in August 2013 and another 2500 in May 2013. Chief Investment Officer Anup Agarwal and COO Travis Carr have also bought 13,000 shares of WMC stock in May and June 2014.

Key leaders in Western Asset have been buyers and never sellers, which is a strong indication the stock is going to continue to grow. The fundamentals of REITs are slightly different from most companies because REITS are required to pay out 90% of their earned income to retain their tax-free status. Over the last 4 quarters, their financial reports have been strong and provided opportunity for growth and returns for investors. Although the mortgage markets are very competitive, Western Asset has been very productive and profitable.

In my last article on Western Asset published here on SeekingAlpha.com on August 4, 2014, I discussed the stock price appreciation. On August 4, 2014 the stock price opened at $13.62, and closed on August 21 at $15.04 (that is $1.42 gain 10.4%). This trend will continue to climb for two reasons.

First, the company pays a very strong dividend. The last 2 dividends have been $0.67, which pushes the yield to about 18%. Many profit takers flock to a dividend that high.

The second reason, I believe, is based on the first two quarters of 2014 production, Western Asset may pay a catch-up dividend similar to last year when the earned dividend was $0.91, but the company paid a total of $2.35 to catch up based on the requirements to maintain its REIT status. I believe the third quarter dividend will remain near $0.67, and the fourth quarter will be another bonus dividend. Investors are likely to bid the stock price up to near $17.50, similar to last year.

I recommended a buy of WMC about 15-30 days after the last quarter ex-dividend date where the stock price was near $13.75. Over the next 60 days, I anticipate the stock price to increase to near the $15.50 price just prior to the ex-dividend date. At this time, with the stock price over $15, it is not the optimal buy in price, but if your goal is to buy and hold the stock to take the cash dividend each quarter, I understand your position.

I do anticipate the stock price will increase leading to the next ex-dividend date, then after the ex-date drop back into the $13-$14 dollar range, and start the cycle again. This cycle can be very profitable for those investors willing to buy after the ex-dividend date and sell just prior to the ex-dividend date. Earnings could surpass one dollar per share, and with a buy-in near $13.75 would result in a 7% profit for the 90-day cycle.

Western Asset Mortgage Capital Corp. is a very profitable stock to own. The key leaders of the company continue to purchase shares over time, which is a positive indicator that the company is likely to remain profitable in the short and long term. Although I am not pushing the buy right now, because the stock price has risen and is getting near the high for the quarter, it remains a stock I support.

There are no indicators of interest rates climbing at this time. We will watch close for this, however, Western Asset and many other REITs and financial institutions have hedges to protect when the rates begin to change. The initial effect will be negative, but the long term of increasing interest rates will allow the companies to increase their spread and have a more profitable position in the market.

Source: Insiders Buying At Western Asset Mortgage Capital