On September 9, 2014 the Board of Directors of CYS Investments Inc. (NYSE: CYS) announced a quarterly dividend of $0.30 per share of common stock for the third quarter of 2014. The common stock dividend will be paid on October 15, 2014 to stockholder of record on common stock on September 24, 2014.
This is a decrease from the last three quarters of $.032, which is not an alarming rate, but investors would much rather see it hold steady than drop. The stock is still paying a 13.6% yield, and that continues to get our support to buy and hold this stock, but the reduction in the dividend deserves a hard look at the numbers.
In reviewing the second quarter's financial report that was released on July 21, 2014, the GAAP net income available to common shares of $153.2 million, or $0.95 per diluted common share. The core earnings plus drop income of $53.2 million ($33.8 million core earnings and $19.4 million drop income), or $0.33 per diluted common share ($0.21 Core Earnings and $0.12 Drop Income). Based on the $0.33, a REIT must distribute 90% of the earnings, ($0.33 x .90 = $29.7), so the company is within REIT standards for distribution requirements. Both of these statistics support the ability to maintain the dividend at $0.32, however, the company may want to hold more cash for new opportunities. One factor that could be a concern is the drop income is based on the future price and future market actions. This number can change, which would affect the earnings and portfolio holdings.
June 30, 2014 book value per common share of $10.31 after declaring a $0.32 dividend per common share on June 9, 2014, compared to our book value of $9.68 at March 31, 2014.
At this time we have no indicators that the Federal Reserve Board is going to allow interest rates to change, however, the Chairwoman of the Federal Reserve Board, Janet Yellen, has stated the Board's intent to keep interest rates low through 2014, but no commitment through 2015. This could be the point of change across the market as more companies maintain their hedge position against the effect of interest rate increasing. The short-term effect will be negative, however, after the interest rates increase and stabilize, financial companies, and CYS Investments will have a larger margin of interest rate spread and become more profitable. We expect to see a 6-month adjustment period where stock prices fluctuate and dividends may be reduced, but the forward side will allow stock prices to appreciate higher, profits to increase and dividends to climb above their current marks.
During the third quarter, there have been no major market events that would create change in CYS Investments' returns and the company's $14.8 billion portfolio has a steady mix of solid investments, including Agency Residential Mortgage Backed Securities (RMBS).
Although we are slightly disappointed in the drop, we continue to support our position of a buy for CYS Investments. The long-term outlook is strong and the dividend is over our goal of "10% or higher." Investors can take the quarterly payout and hold their position, or reinvest the dividends to grow their position. With the anticipated increase in stock price value after the interest rates climb, growing your position makes good sense and increases your total portfolio value.
