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By Ahmed Ishtiaq

Armour Residential (NYSE:ARR) is one of the most popular mREITs among investors. The company is primarily focused on investing in agency-backed residential mortgage securities. The company's residential mortgage backed securities portfolio is comprised of adjustable-rate, hybrid adjustable-rate and fixed-rate residential mortgage-backed securities issued or guaranteed by the U.S. government-chartered entities. These entities include Federal National Mortgage Association (Fannie Mae), the Government National Mortgage Administration (Ginnie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac).

The company is managed and advised by Armour Residential Management LLC, a body affiliated with Armour's executive officers. Armour decided to be elected and qualify to be taxed as a real estate investment trust for U.S. federal income tax purposes.

Juicy dividends:

As is the cash with most of the mREITs, Armour offers an extremely attractive dividend yield of over 16%. At the moment, Armour pays an attractive monthly per share dividend of $0.09. To keep their tax status mREITs pay at least 90% of earnings to investors. Thus, the main focus of the mREITs is to pay back to investors in shape of nifty dividends. Therefore, high cash distributions make Armour an attractive investment for investors looking to collect dividends.

Stock Performance and Ratios:

(click to enlarge)ARR Chart

ARR data by YCharts

Armour's stock price has been fluctuating during the past year. However, the price has been between $6.5 and $7.70. At the moment, the stock is trading at $7.66. Armour has a market cap of $1.8 billion. The stock has an average daily volume of over 10 million stocks. It has a relatively high P/E ratio of 22.6 while the industry average stands at 39.1. Armour has shown exceptional revenue growth of over 30% during the past three years while the industry average remains just above 5%.

Asset composition and Future Prospects:

Armour had agency securities worth $13.3 billion on its balance sheet. At the end of June, 2012, the company reported that it has 78% of its investments in fixed rate securities. Only 22% of the total investment is invested in adjustable rate mortgages.

Armour usually tries to hold most of its agency securities for long term. The company may, from time to time, sell any of its agency securities as part of its overall management of portfolio. Management decides the suitable classifications of the securities at the time securities are acquired. In addition, management also evaluates the suitability of such classifications at each balance sheet date.

Armour finances the acquisition of its agency securities through repurchase agreements. Agency securities are subsequently used to secure the repurchase agreements. The interest rate on these repurchase agreements usually corresponds to the Federal Funds Rate and the London Interbank Offered Rate [LIBOR]. Under the repurchase agreements, the company sells securities to a lender and agrees to repurchase the securities in the future for a higher than original sales price. The difference between the sales price that the company receives and the repurchase price that it pays represents interest paid to the lender. At the moment, spreads are quite high due to the low interest rates. Thanks to this atmosphere, the company receives high rates on its investments but pays a lower interest rate on its borrowings.

The future prospects for mREITs are good. In a recent statement, the Fed announced it would acquire $85 billion in bonds a month for the rest of the year. In 2013, the Fed will continue to buy $40 billion per month of mortgage-backed securities indefinitely until it thinks the economy does not need the support. Also, the benchmark interest rates are likely to remain low until at least mid 2015, six months longer than previously planned.

Comparison with Peers:

ARMOUR peers include American Capital Agency Corporation (NASDAQ:AGNC), Annaly Capital Management (NLY) and Chimera Investments (NYSE:CIM).

ARMOUR

American Capital

Annaly

Chimera

P/E

22.60

9.60

52.60

4.9

P/B

1.30

1.30

1.00

0.80

P/S

7.80

8.50

25.30

N/A

EPS Growth

30.90%

28.60%

-16.70%

N/A

Operating Margin

63.80%

88.50%

60.30%

N/A

Yield

16.45%

14.88%

12.89%

14.76%

ROE TTM

4.30%

12.20%

2.10%

17.80%

Debt to Equity

0.00

0.00

0.10

1.80

Source: Morningstar.com

The table above shows that the stock is trading at attractive multiples and margins as compared to its peers. The most important metric for dividend stocks is the dividend yield. At the moment, Armour offers the highest dividend yield as compared to its peers. In addition, the company has healthy margins and supports an impressive EPS growth.

Summary:

The current interest rate environment provides mREITs an opportunity to make healthy profits. In the low interest rate scenario, the spreads for the mREITs widen. The widening spreads offer investors an opportunity to invest in mREITs and enjoy healthy cash distributions. After the recent announcement by the Fed to further support the economy, it is almost certain that Armour will keep making heavy cash distributions in the near future. The stock is attractively priced and provides a great opportunity to collect dividends.

Source: Armour Residential: A Double-Digit Yield Opportunity In The mREIT Market