Western Asset Mortgage: A Phoenix Rising?

| About: Western Asset (WMC)


I've told you WMC was setting cash on fire in the past and was a train wreck.

I am rooting for the company and revisit the name to discuss performance issues.

Use extreme caution and stay on top of the name.

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 it's been cut and cut again. Performance was so bad I called it "simply disgusting," and the phrase "train wreck" came to mind. I suppose I should be slightly more objective despite the company destroying shareholder value and crushing blue collar investors who chased the dividends. Believe me, I want the company to do well. I want them to deliver and to make investors a lot of cash. I want retirees to have secure income from a name like this. This one was one of my favorites three years ago. 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 good news is that for the sector, things have been on the mend slightly, but I am not anywhere near ready to get back on board with this train wreck. You will recall that in the company's Q2 report, we learned the company again had some trouble covering the dividend that is all the way down to $0.31. However, in Q3, the name rebounded a bit.

Now I don't want to be totally sour; the company did turn things as the company swung from a huge GAAP net loss of $36.3 million, or $0.88 per share in Q1 to a GAAP net income of $17.3 million or $0.41 in Q2 and is now reporting its Q3 GAAP net income was $32.3 million or $0.77 per share. That is moving in the right direction. However, the best gauge for the dividend is core earnings. Western Asset Mortgage saw core earnings plus drop income of just $14.8 million or $0.35 per share.

I am pleased to report that this was a $0.04 coverage of the dividend and made up for the $0.01 shortfall of the dividend paid in Q2. That is strong, but recall there was a big $0.22 shortfall of the $0.45 dividend in the prior quarter, so we need the company to have out-earned its dividend. It did that, but not by much. Still, it seems the company is putting out the fires. But I still worry about a further cut. The path of the dividend has been sad as well. In Q4 2015, it paid $0.58; in Q3 2015, it paid $0.60; and in Q2 2015, it paid $0.64. Now we are at $0.31, taking the share price down with every cut.

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. Book was $11.to start the quarter. At the end of the quarter the company had an $11.48 book value net of the dividend. However, considering a year ago, it was over $13.00, I guess we can file this under baby steps. Things are moving in the right direction. Is this a phoenix rising from the ashes of the carnage? That remains to be seen.

Take home message? There were some signs of life, but I would still stay far away right now. I am rooting for the company. This company and the stock was one of my worst calls and worst-performing names in my investing career behind Line Energy. There are much stronger names in this dangerous sector. The stock could become a strong buy again, but now is not the time. Be cautious moving forward. I am not a buyer here.

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.