Chimera: This Is Really Something

| About: Chimera Investment (CIM)
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Summary

CIM is outperforming the mREIT sector as whole.

Consistently delivering; I discuss the just reported Q4.

Honing in on key metrics this best-of-breed is a must own.

Chimera Investment Corporation (NYSE:CIM) has performed well in the last two years, outperforming the mREIT sector as whole. It really is just one of the best. Those who persevered through a reverse split and accounting issues from the past have been rewarded immensely. It has helped, of course, that the sector has been on fire lately, but I will say that this is a name I have been bullish on even in the weak environment for mREITs. It has consistently delivered. It has consistently outperformed the sector. It is really something to behold.

I will further say that the company just reported another fantastic quarter. The Q4 report has come in right above my expectations for the sector. General sector weakness is still being driven by a constant prepayment rate that is simply too high for the companies to effectively make money and is crushing some companies in the sector. Chimera's diversification, of course, has led the company into having an industry-leading net interest rate spread and generally stable book value, along with easily covering its dividend. So how is the company doing?

Net income was once again positive. It came in at $221 million and this is up from $172 million last quarter. It translates to $1.17 per share in earnings. However, this is a GAAP measure, which has strong merits, but doesn't really tell us much about the ability to cover the dividend. Core earnings provide a much better indication of coverage. The company's core earnings for the quarter came in at $0.65 per share. That is a huge win. Why? Because these earnings easily covered the quarterly dividend, as Chimera paid a common stock dividend of $0.50 per share for the quarter. The annualized dividend yield on the stock is 11%. There have been several quarters of outearning the dividend which means there is a spillback contingency fund.

Of course, what about the all-important book value? Well, this was an area where the company has been hit over the last few years, and took a bit of a blow in Q4. In fact, book value fell after rising for two consecutive quarters. GAAP book value was $15.87 per share, down 2% from the $16.18 per share in Q3. A big takeaway here is that the company is now trading at a premium-to-book. This has been exceptionally rare for stocks in the sector for years. The company currently trades at $17.95, which is a $2.08 or a 13% premium-to-book. As many are likely aware, this is a massive turnaround from the 19.7% discount-to-book when the company reported a year ago. What an incredible move. The market has strong confidence in the name. And at an 11% yield, it only takes a few years to make your entire investment back in dividends.

But how is the company so successful? Well, Chimera is a leader in the sector for its net interest rate spread. Now, that said, we have to remember that the net interest rate spread had been falling for several quarters, following a general trend in the sector. To briefly recap, you may remember that in 2014, the spread was averaging 4.4%, and coming into 2016, it was 3.2%. It was stable and on the rise in 2016. In Q4, the spread came in at 3.5%, while net interest margin was 4.0%. While this spread is down heavily from the almost 5% a year ago, to see the spread having widened off the lows and be maintained is a good sign. This was somewhat surprising as prepayments in the sector have been on the rise. The impact of prepayments to Chimera is unclear, but despite the pressure, Chimera remains an industry leader in its spread, and in dividend coverage. It is a powerhouse.

No doubt about it, the company continues to be best of breed and hence commands a premium-to-book value. That is rare in this sector. The results were strong and this name continues to be a winning recommendation in an otherwise losing sector. This name is a trustworthy dividend payer. I am bullish, but wait for a pullback to buy more.

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Disclosure: I am/we are long CIM.

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.