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Where Does WMC Stock Go From Here?

|Includes:Western Asset Mortgage Capital Corporation (WMC)

WMC price has fallen a long way from a couple of weeks ago. After the Q1 dividend announcement the price reached $16.80 (a 14% premium over BV of $14.74) but then nervousness set in about an SPO and the price drifted down 7% to $15.44 and then the SPO was announced and the price dropped another 8%. The price was then about 1% below BV at $14.60.

The recently announced SPO shares don't have an official price but since WMC published the number of shares (13M) and the expected capital that will be raised (193M). From those numbers we can approximate the share price at $14.85 which is probably pretty close to current BV. One can conclude then that the BV wasn't affected very much by the SPO. This is in stark contrast to what ORC did to its stockholders in January when with a BV of $13.40 they did an SPO at $12.50 and decimated BV.

If WMC can maintain its $.67 dividend that would result in an annualized return of 18.4% (based on a $14.60 price) which would be second only behind MORL among MREITS investments in dividend performance. If WMC maintains the dividend their stock price will almost certainly rise.

If the dividend drops 10% to $.60 that lowers the return to 16.4% which is still a very healthy return and I think the price would at least hold to where it is now.

The MREITs are generally in a sweet spot now. Long term rates are now 1% higher than last May rates were, short term rates are locked down for at least a year and volatility is very low so hedging can be backed off a bit. All this results in a greater net interest spread that can be leveraged higher. In this environment I would expect WMC to thrive (as well as most MREITS) and be able to maintain their current dividend (and maybe even increase it over the next year). After all, in last year's squeezed interest rate spread they still maintained that $.90 dividend and $18 share price (20% return).

WMC is a very good buy at $14.60.

Stocks: WMC