James Shell

James Shell
Contributor since: 2010
Company: ISO-Help.com
Keep in mind that in a lot of these spinoff situations, it is quite common for their to be sort of a post-partum depression... if you would like to see an example of this, check the stock chart of COP when it split off with PSX. In that case it took nearly 6 months, and a couple of quarterly reports for this stuff to settle out...
So I would have to say that the fact these companies are both still looking better than they were a year ago is a net positive.
thanks for your correction. I will submit an edited version promptly.
Thanks for your correction. I will submit an edited version promptly.
You are right, of course, but you'd better believe that the management wakes up every morning knowing that they are going to have to write roughly a $1B check every quarter for their 1.9 Billion shareholders, and if they are forced to cut the dividend, that will cause a lot of problems for them. Whether they write the check to the bank, or to the shareholders, I suppose to them comes to the same.
It is quite true that the "shareholders" in this industry receive a distribution of the remainder of the profits once all of the expenses are paid, by the very definition of the business. But, it's in the shareholders' interest to have the business continue to sustain their dividends at the current level if for no other reason than to preserve their equity. The management also wants to support the share price.
So, in essence, given the strong urge to keep the share price stable, the managers are going to look at alternatives such as the preferred stock and debt as lower "cost" sources of capital.
Here is my theory on this: These mREIT managers have to hate a moving target. If they know, with some degree of certainty, that interest rates will either move consistently in one direction or the other or stay stable, they can make their changes and do their financial engineering and come out fine.
What drives them crazy is what happened in mid-2011 when all of the Greek Flu happened, and interest rates, already at multi-decade lows, went down unexpectedly.
In the article linked above, we pointed out that Crexus, with a portfolio of around $700M, iso in the grand scheme of things, we are not talking about a major portion of the portfolio yet, but it does indicate a willingness to change what they are doing...
What I mean is that the overall market has been going through a lot of drama lately, what with the Euro peril, post-election-partum depression, and a lot of psychoses, and a general downdraft that affects everything could easily move this stock 35 cents on a given day.
We analytical people can do a lot of work on the basis of value, understand the overall business strategy and work hard to try to understand the fundamentals, and then have the whole thing wiped out by the overreaction of some underpaid security guard in Egypt who chooses to fire into a crowd of protestors, which actually happened a year or two ago. . go figure.
Actually that is the very definition of preferred stock. It is usually part of the corporate by-laws and there may also be legal requirements that give the preferred shareholders priority.
I will check into this at some point to confirm what the rules are for AGNC and NLY.
The problem is that a lot of people assume that dividends will remain constant or increase forever.
There is a calculation you can do to the effect that at the current dividend of 15% per year and shrinking, and a stock price of X and shrinking, that you're still better off investing in some of these mREITs than you are in XOM, with a 2% dividend and a company that smaller than it was in 2008 in market cap.
The more this chaos happens, the more I am liking the preferred stocks of these two big REITs. A nice 7.5 or 8% dividend, some price stability... I don't see a downside.
You are exactly right, they can, all other things being equal, increase leverage to maintain the same size of portfolio. They do tend to keep their leverage fairly constant, because of their overall operating strategy.
With a few exceptions all of the financial stocks are being beaten up right now, because of continued uncertainty in the marketplace.
In addition to the normal amount of chaos, we are having to deal with turbulence in the overall marketplace.
As you can see above, I have 405 comments on my 110 articles, an average of just under 4 per article, but it is true that in the last month my comment rate is a little lower...
I think that the SEC requires anyone who makes a transaction that is over a certain percentage of the outstanding shares of a stock is required to report it. Someone will have to refresh my memory on what that number is.
And certain officers are required to report transactions to the SEC of any amount.
I actually used the words "flash crash" in my original draft of this article, but I opted to tone it down a bit...
Here is my point: If I thought there was a fundamental problem with this group that caused mass exodus from the stocks, AGNC included, I would be right there with them.
But, if this correction has nothing to do with the underlying fundamentals but is an artifact of some engineer's computer program, I will be inclined to hang in there, because the reason I bought the stock in the first place was to collect the dividends.
All I am trying to do is sort out which is which. In my opinion at the moment that although there are problems in this group, there is no compelling reason to hit the panic button based solely on Monday's activity.
I think the actual behavior of AGNC, which is back up to 33 at the moment, is vindication of this.... we will see;
My evolving opinion on all of these preferreds, NLY included, is that they might ultimately be the way to go in mREITs. No volatility, a nice 7 to 8% dividend that has precedence over the common, and even though you are walking away from a potential higher ROR it would not take too may corrections of the underlying stock to make up for it.
a secure 7.5% in the current era is nothing to sneeze at.
I have another article coming out on this topic. Stay tuned.
Yes, Black Rock Trust is a major holder of both AGNC and NLY. It has a 6.3% dividend, but only went down a couple of percent on Monday, so this approach might insulate you a bit from the volatility that we saw on Monday.
MORT is another ETF that focuses on this industry, and although it did crash on Monday, it is already back to where it was last week, so the diversification strategy paid off, in that case. MORT pays about 10% dividend, and consists of 100% mortgage REIT investments.
You will enjoy the article that I have pending on this "unusual" activity, if SA will be good enough to post it.
You are right about the trading aspect. A couple of my followers have communicated some really interesting trading strategies in advance of the dividend date that are really interesting... But as we saw this week, booby traps are everywhere in this business.
The correction has been made and is reflected in the above table. Thanks for pointing this out.
BTW I am now even more intrigued by NYMT and will probably go long after the dividend is paid.
I stand corrected, that number was the PE. The correct dividend yield should be 14.50%. I will try to correct that table.
It came from Yahoo Finance, and I believe it is the annualized current dividend.
I agree with this one. Buy after the dividend, as it says above.
This whole issue of residential vs. commercial deserves some additional study. If you have a residential mortgage company like MTGE which is leveraged at 8:1 or something, vs. RSO above, which is leveraged at 4:1, is it not true that the management of the company has adjusted the risk for you?
A second question: What about the conservative NLY? They only deal in residential, agency backed mortgages, but are leveraged at a much lower level.... there, the management has accepted much less risk.
The reason I put RSO and MTGE in the same category is that they are basically in the same high-dividend, interest rate spread business, and in the grand scheme of things they are more like one another than they are like AAPL or XOM, which actually have products and sell them for a profit.
Yes, simple is good. The classic "buy and hold" strategy is quite often the best.
Well, there is one additional calculation to make, that being the refining margin. TSO got $13 per barrel refining margin in the last quarter, HFC, because it is in the middle of the country using landlocked crude oil, got $19.93 per barrel last quarter. So, there should be a little premium on HFC's capacity, just as there should be on WNR's because they are geographically isolated enough so that the bulk of their throughput has favorable economics.
I actually kind of like HFC
Holly Frontier
Market Cap 8,380,000,000
LTD 1,295,163
Total 8,381,295,163
Refining Capacity 443000
Here are two of the three. WNR: That one was a special case, if I am not mistaken, they made the worst refinery deal ever when they bought that refinery in Virginia for pretty close to 19000 per bpd a few years ago.
Let's see:
Market Cap 2,460,000,000
LTD 450,000,000
Total 2,910,000,000
Refining Capacity 151000
Yes, that whole story in the middle of the country is really remarkable. A little OPEC member out in the prairie in North Dakota, and gas in Denver at 3.35 this morning, versus 3.65 in the gas station across the street from where I am because of the landlocked refinery capacity and crude oil glut.
And you're right, the situation has a little longer to go.
LOL true enough. I think these stocks should be priced at some function of their ability to make money.
The situation going on in these refiners is actually unprecedented in history, because of the difference between Brent and WTI and the temporary imbalance of supply of crude oil and refinery capacity in the US Midwest.
It is not quite like the situation in the 2007 and 2008 time frame when the refiners were trading much higher than they are right now. Demand for the products never really recovered from the 2008 meltdown.
Yes, patience is important.
45% of the float of AGNC is held by institutions and major shareholders. This is not high, in the grand scheme of things (I think XOM is more like 80%) but it is high enough that if some of the really big players choose to reallocate, the rest of us will feel it.
We have a couple of quarters of potential dividends ahead of us, and it should give us some time to think.
Oh, this is just a computer model, and as a result it is more useful to think about it in a qualitative way, rather than a quantitative way. When those computer models track the hurricanes, they always give a "cone" which says the further out you go the less certain the forecast.
You can say the following:
If Bernanke continues to dump money into the economy in advance of the election, and the spreads remain low, the price will go lower because the dividend will be vulnerable.
If AGNC's management continues the strategy of additional share offerings, the results will continue to be negative, particularly if the spreads continue to shrink.
If they expand the program of preferred stock, that is a winner. At some point, maybe the 8% preferred stockholders will be better off.
We're going into a really tricky period. We will know a little more about how AGNC is going to be able to adapt to it when we get their 10Q.
Since they have all of this cash on hand, we can have a couple of quarters of dividends ahead of us, maybe we will know more by January.