Newcastle Investment Corp. (NCT) is set up as a real estate investment trust (REIT) that is focused on investing in real estate assets, such as residential mortgage securities, mortgage servicing rights, commercial real estate debt, and other related assets. Like many investment companies in the REIT sector, this company uses leverage. By borrowing money at low interest rates and using those funds to invest in securities that generate higher rates of return, this company is able to increase returns, as well as the dividend payout to shareholders. This company invests in assets that generate stable long-term cash flows, which reduces risks for shareholders. Here are four reasons to consider buying this stock:
1) Newcastle Investment Group is externally managed and advised by an affiliate of Fortress Investment Group (NYSE:FIG), which is a well-known and diversified global investment manager. Top management can give this company an edge and generate potentially higher returns for shareholders, while maintaining strong risk controls.
2) This company recently reported solid financial results. For the second quarter of 2012, it announced core earnings of $39 million or 29 cents per share. It also stated that as of June 30, 2012, it had a portfolio value of $4.3 billion, which consisted primarily of $442 million of residential servicing and securities investments and $3.9 billion of real estate debt and other assets.
3) Newcastle has a high level of management ownership. For example, the most recent data shows that Wesley R. Edens (Chairman) owns about 5,644,191 shares, Randal A. Nardone (Secretary) owns about 4,704,786 shares, and Kenneth M. Riis (Chief Executive Officer and President) owns about 764,990 shares. Other insiders also hold significant amounts of stock; the full list can be seen here. Significant ownership levels by management is reassuring since it shows alignment with shareholder interests.
4) While a high dividend yield can be a warning sign, that does not appear to be the case with Newcastle. Since it is set up as a REIT, it is mandated to payout most of its earnings to shareholders. Combine that with the smart use of leverage and it is easy to see why this business model can deliver dividends that can vastly outperform most stocks. Consider that over the next five years an investor in this stock can see dividend returns of over 50%. Compare that to what some other stocks are poised to return and it's easy to see why it might make sense to allocate a portion of your portfolio towards high yield stocks like Newcastle.
For example, oil giant Exxon Mobil (NYSE:XOM) yields just 2.6%, Johnson & Johnson (NYSE:JNJ) yields just 3.6%, and what might be considered as the "blue chip" by many income investors, General Electric (NYSE:GE) (which has a significant financial division), offers a yield of 3.1%. Stocks like these that yield around 3% or so, are on track to provide investors with returns of about 15% over the next five years through dividends. That is solid when compared to money market rates, but it pales in comparison to the over 50% in dividend returns that Newcastle could provide.
Very few stocks can provide sustainable yields of over 10%, but the REIT sector is an area that can, and more investors should become familiar with these stocks. Other high yielding REIT stocks like Annaly Capital Management, Inc. (NYSE:NLY) and American Capital Agency Corp. (NASDAQ:AGNC) also provide yields of over 10%, and use leverage. This should help investors take comfort in knowing that high yields are not a warning sign, but rather a result of having a REIT status and a business model that works well for income investors.
Here are some key points for NCT:
- Current share price: $7.53
- The 52 week range is $3.56 to $7.88
- Earnings estimates for 2012: $1.57 per share
- Earnings estimates for 2013: $1.44 per share
- Annual dividend: 80 cents per share, which yields about 10.3%
Data is sourced from Yahoo Finance.
Disclosure: I 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.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.