Anworth Mortgage (ANH) reported below expected third quarter performance on October 25, 2012. Analysts were expecting a consensus mean earnings per share of $0.17, whereas the company reported an EPS figure of $0.15 per share, about 12% below expectations.
The following table gives a complete picture of the performance during the third quarter.
The company generated $47 million in interest income during the third quarter of the current year, which was 14% below the interest income that it generated during the third quarter of the previous year. Despite a 5.6% year over year increase in the interest yielding assets, the interest income declined. Much of the decline in interest income was attributed to the decline in asset yields, from 3.15% in the linked quarter to 3.04% at the end of the third quarter. This represents a direct impact of the implementation of the third round of easing conducted by the Fed, where the Fed is buying agency bonds that are fixed rate in nature. Around 21% of Anworth's entire portfolio is invested in such fixed rate mortgage backed securities that the Fed is buying. As a result of Fed bond buying, the prices of these bonds have increased, resulting in a decrease in the yields.
During the third quarter, the company was not able to benefit from the ultra low interest rate environment. When compared to the linked quarter, the cost of funds remained flat at 1.08% while the interest expense surged 2%.
While the net interest margin declined 18 basis points compared to the linked quarter, net interest income of $25.4 million that the company earned during the third quarter declined 23% year over year. This is compared to a sequential decline of 20 basis points and 27 basis points in the net interest margins of Capstead (CMO) and Hatteras (HTS), respectively.
The company was not able to curtail its operating expense and it surged 12%, to $3.8 million at the end of the third quarter of the current year. Lower net interest income and higher operating expenses led to a bottom line of $22 million, 28% below the bottom line of the same quarter of the previous year.
Asset Portfolio Composition:
At the end of the third quarter, 21% of the entire assets portfolio is composed of fixed rate agency mortgage backed securities - the rest is composed of adjustable rate agency mortgage backed securities with different reset periods ranging from less than 5 years to less than 1 year. This is compared to 19% of fixed rate securities and 81% adjustable rate securities at the end of the second quarter of the current year.
The stock offers a dividend yield of around 10%, compared to only 1.86% offered by the 10-year treasury. The dividend yield is backed well by an operating cash flow yield of 27%. During the current year, the company has already slashed its dividend distributions twice.
In conclusion, despite the fact that the company owns a major stake in adjustable rate agency securities, which the Fed does not intend to buy, the results for the third quarter were affected negatively by QE3. Going forward, we believe the company has sufficient financial muscle to continue its elevated dividend distribution, even if the Fed accelerates its bond buying program. Therefore, we recommend income oriented investors to long the stock.