Are Covered Call Options With mREITs Still Profitable?

by: Brian Gorban

I recently wrote an article here discussing not only the favorable valuations in the mortgage REIT sector, but adding nice additional income through covered call options. These companies included American Capital Agency (AGNC), Annaly Capital Management (NLY), Capstead Mortgage (CMO),Chimera Investment (CIM), CYS Investments (CYS), Hatteras Financial (HTS), and Invesco Mortgage Capital (IVR). Now as most of them have declared their dividends, let's take a follow-up look and see if this investment still makes sense.

Chimera just announced a positive surprise that it will maintain the same $.13 dividend as the prior quarter. The consensus was for at least a penny if not two cent drop to $.11 due to what seemed to be deteriorating market conditions, but Chimera proved otherwise and this cheap stock is a great buy here selling at 5x price/earnings, .9x price/book, an over 17% return on equity, and still 17.5%+ dividend. Moreover the strong recent insider buying I mentioned here is encouraging.

I still feel this is a great buy under $3/share and selling the Mar 2012 $3 calls against those at .20 per contract. Hatteras and American Capital also maintained their respective dividends from the last quarter. As I wrote here, American Capital is a buy here at $27/share trading at 6.5x price/earnings, achieving over 18% returns on equity, and over 20% dividend yield. The Mar 2012 $27 calls are attractively priced ay $1.95 per contract. Hatteras I feel is a good buy here as well at $25.50 since they trade at just over 6x price/earnings, achieved over 15% returns on equity, and has almost a 16% dividend yield. The Jan 2012 $26 calls are trading at $1.75 which is a nice premium when considering another $2 in dividends will be received.

Annaly, Invesco Mortgage, Capstead Mortgage, and CYS Investments all unfortunately decreased their dividend payout from the previous quarter. While all of these have seen a hit to their share price and came back to attractive valuations, the only one I can recommend is Annaly due to their having by far the most experienced management team and credibility to assure investors that this will be resolved quickly. They offer
another favorable covered call that I find great value in--buying the stock at $17.55 and selling the Jan 2012 $17.50 calls at .65 per contact and being able to receive about $1.20 in dividends as you wait for the time being. The stock is attractively priced at 6.5x price/earnings, 1x price/book, and still about 14% dividend.

Overall though, I still maintain that with the Federal Reserve maintaining low rates for at least another two years according to Chairman Bernanke, all of these companies have favorable conditions going forward and should provide investors with a great dividend during that time as their covered calls look to execute.

Disclosure: I am long NLY, CIM.