Chimera: Simply The Best

| About: Chimera Investment (CIM)


CIM has outperformed just about the entire mREIT sector.

I discuss reasons for success and examine Q3 critical metrics.

A premium name that should be bought on a selloff.

Chimera Investment Corporation (NYSE:CIM) has performed well in the last two years, outperforming the mREIT sector as whole. It is simply one of the best. This is a name I have been bullish on even in the weak environment for mREITs, and the company just reported another great quarter. This Q3 has come in right above my expectations for the sector. General sector weakness is still being driven by a constant prepayment rate that is simply too high for the companies to effectively make money and is crushing some companies in the sector. Thankfully, Chimera's diversification has led the company into having an industry-leading net interest rate spread and generally stable book value, Chimera is still one of the only companies that is not only maintaining its dividend, but raising it. So how is the company doing?

Net income was positive. It came in at $173 million and this is up from a loss of $48 million last year. It translates to $0.92 per share in earnings. However, this is a GAAP measure, which tells us nothing about the ability to cover the dividend. Core earnings provide a much better indication of coverage. The company's core earnings for the quarter came in at $0.68 per share. That is a win. What is most important to note is that these earnings easily covered the quarterly dividend, as Chimera paid a common stock dividend of $0.48 per share for the quarter. The annualized dividend yield on stock is 12%. There have been several quarters of outearning the dividend which means there is a spillback contingency fund. The company also raised its dividend, again

What about the all-important book value? Well, this was an area where the company has been hit over the last few years, but it didn't get hit this quarter. In fact book value rose for the second consecutive quarter. GAAP book value was $16.18 per share, up 2.5% from the $15.78 per share in Q2. It is also up nicely from the $15.52 per share in Q1. However, this is down noticeably from the $17.00 level per share a year ago. The company is now trading at a premium-to-book. This has been exceptionally rare for stocks in the sector for years. The company currently trades at $16.50, which is a $0.32 or a 2% premium-to-book. As many are likely aware, this is a massive turn-around from the 19.7% discount-to-book when the company reported 9 months ago. The market is regaining confidence in the name. And at a 12% yield, it only takes a few years to make your entire investment back in dividends.

The company makes money because it has a strong foundation. Chimera is a leader in the sector for its net interest rate spread. Well, the net interest had been falling for several quarters. Following a trend in the sector. On average, in 2014, the spread was 4.4%, and coming into 2016, it was 3.2%. It has been stable and on the rise here in 2016. In Q3 the spread rebounded to 3.9% While this is down heavily from the almost 5% a year ago, to see the spread widen and be maintained is a good sign. This was somewhat surprising as prepayments in the sector have been on the rise. The impact of prepayments to Chimera is unclear, but despite the pressure, Chimera remains an industry leader in its spread.

Overall the results were strong and this name continues to be a winning recommendation in an otherwise losing sector. This name is a trustworthy dividend payer. The company continues to deliver in an extremely difficult market. I am bullish, but wait for a pullback to buy more. If the name pulls back, then do some more buying of this quality name.

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.