Here is the current price and dividend yield. I am going to compare it to American Capital Agency (AGNC) which everyone loves:
|American Capital Agency||AGNC||29.57||16.91%|
|Hatteras Financial Corporation||HTS||27.79||12.95%|
Note: Both of these Mortgage REITs are 100% agency-backed, are big and have been around long enough to get a performance measurement. Both are trying to raise additional capital by share issuance, and both are leveraged roughly equally at around 8:1. HTS's interest rate spread is lower because it invests primarily in ARMs and 75% of its portfolio will reset in 3-8 years.
1. At Equal Dividend Yield
|Based on Current Dividend Yield|
|HTS Div Yield||0.1295|
|HTS Div per Share||3.60|
|AGNC Div Yield||0.1691|
|AGNC Div per Share||5.0000|
|HTS Price at AGNC Div Yield||21.29|
|AGNC Price at HTS Div Yield||38.60|
At equal dividend yield to the more beloved AGNC the correct price of HTS should be around $21. If you do the calculation in reverse, AGNC should be closer to 39.
2. If Dividends Continue on their Current Trajectory
Here is the dividend payout for HTS and AGNC over the last few years:
Here is a calculation using as starting point the beginning of 2010:
|Current Div Yield||12.95||16.91|
|Dividend, Q1 2010||1.2||1.4|
|Dividend, Q1 2012||0.9||1.25|
|Shrinkage Rate (Per Year Avg)||0.15||0.075|
|Expected Dividend, Q4 2012||0.75||1.175|
|Q4 2012 price at current yield||23.17||27.79|
If the dividends continue at this trajectory, and assuming similar yield, the logical stock price of HTS should be about $23, and the price of AGNC only a little below what it is right now, just under $28. This pretty much explains the difference. The market has priced in the shrinking dividend of AGNC to a greater extent than that of HTS.
3. At a Comparable EPS Multiple
|HTS Price at AGNC PE||22.44|
|AGNC Price at HTS PE||36.62|
HTS is currently trading at about 7 times earnings, versus AGNC at 5.66. If HTS were valued in the marketplace at the same level, we'd be looking at a price between $22 and $23. If you do the reverse calculation, we're looking at an AGNC price of around $37.
4. There is No Sentiment to short HTS
Here is the current percent of the float that is short for these companies. I'm not ready to say that there is much difference between the two:
|AGNC Short % of Float||4.88%|
|HTS Short % of Float||4.77%|
Keep in mind that the world is chaotic, and there are no guarantees on anything, but I think we can conclude the following:
If HTS is correctly valued in the marketplace where it now is, AGNC is undervalued by nearly $10. Logically, if AGNC is priced correctly in the market, HTS should be in the low $20s, as we noted the other day.
The explanation may be that the market has punished AGNC to a greater extent for its recent dividend cuts than HTS. Whether this will continue to be the case is obviously the question of the day, and there is a chance for price movement in both of these funds if the market readjusts.
Do with this information what you will.
Additional disclosure: My long order for ARR was finally executed, and I exited CIM yesterday in advance of the ex-dividend date, which is next week.