As you know I have been following Western Asset Mortgage (NYSE:WMC) for some time and recently downgraded the stock. I then told you it was setting cash on fire and I was out. The name has been trading with extreme volatility of late. That said, I felt pretty strongly that the company's dividend was in some jeopardy and sure enough back in December, as I feared, management announced a dividend cut. And then, once again, more bad news came in March. When I told you it was burning cash, I specifically said that once again the dividend wasn't covered, and by a wide margin, and it could get cut once again.
Well the axe just fell once again. We learned today that WMC's Board of Directors has declared a cash dividend of $0.31 per share for the second quarter of 2016. Today's dividend is payable on July 26, 2016 to common shareholders of record as of July 5, 2016, with an ex-dividend date of June 30, 2016. Friends, this is a 31% decrease from the last dividend of $0.45 and brings the yield in line with the sector, to under 13%. Ouch.
I think much of this cut was priced in to the stock and so I don't expect much of a sell-off, but do expect shares to take a hit. The reason I feel that this was priced in is because WMC's last quarter was far worse than the sector averages. The company reported a huge GAAP net loss of $36.3 million, or $0.88 per share. Western Asset Mortgage saw core earnings plus drop income of just $9.5 million or $0.23 per share. That was disgusting to be frank with you it was a tragedy because it was a big $0.22 shortfall of the $0.45 dividend. This is why I cautioned it would be cut. The path of the dividend has been sad as well. In Q4 it paid $0.58, in Q3 it paid $0.60, and in Q2, it paid $0.64.
Now, I previously told you not only was I concerned with the dividend, but also book value in the name. When I told you that the name was burning cash, book value was at $10.90. Here there is a small sliver of hope. This is because to soften the blow of the dividend news, the company noted that its book value was up 2.8% to $11.19. Of course, this is still down incredibly from the fall when in Q3 2014 it was at $13.26
Take home message? Stay far away. Despite generally improving key metrics last quarter, this is the type of train wreck you need to steer far clear of. It pains me to see what has become of the company performance wise. Some who try and bottom-fish on these names might be taking stabs here. I don't blame you, but I would be very cautious moving forward.
Note from the author: Christopher F. Davis has been a leading contributor with Seeking Alpha since early 2012. If you like his material and want to see more, scroll to the top of the article and hit "follow." He also writes a lot of "breaking" articles, which are time-sensitive, actionable investing ideas. If you would like to be among the first to be updated, be sure to check the box for "Real-time alerts on this author" under "Follow."
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.