Lightening Up On My Arbor Realty Position
Summary
- Arbor Realty still has an attractive forward dividend yield, although it is no longer above 8%.
- The dividend is likely to be increased at least twice in the next year.
- The sharp move higher in the past month is a reason to reduce my rating from Very Bullish to Bullish.
- The move higher has also thrown my portfolio out of balance and I will be selling some of our shares.
I still like Arbor Realty (NYSE:ABR). In fact, while I still like it a lot, I currently find it less attractive than I did back on April 10th when I rated it Very Bullish (I consider this to be the Seeking Alpha equivalent to a Strong Buy). So, what happened? Simply put, the price moved up from the $15.93 within weeks of writing that April 10th article (or the $16 when it was published) to a high of $18.06. That not only was a gain of more than 13%, but it was also its highest price in more than 13 years.
That article concluded with the following:
With the shares closing the week at $15.93, I have decided to increase the rating to Very Bullish.
Not only do I expect at least two dividend increases in calendar 2021, but I am also anticipating a double-digit percentage rise in the share price, eclipsing the $17.1899 intra-day high reached earlier this year.
To earn that "Very Bullish" rating, I had also noted the very attractive $1.32 dividend was yielding "~8.25%," although that wasn't sufficient for me to rate the stock Very Bullish. I also wanted to see capital appreciation of around 15%. Without an expectation that both of these criteria would be met, I would have simply reiterated my prior "Bullish" rating.
Currently, one of my concerns is that anyone reading the previous article could be misled. I still expect to see at least two dividend increases announced this year, but the dividend yield is still likely to be less attractive than the 8.25% yield previously mentioned. More importantly, as a consequence of the 13% rise in the share price, my expectation is that anyone reading that article today would see future capital appreciation over the next twelve months that will be less than the 15% cited in that article.
The Dividend
Despite the recent rise in the share price, the dividend remains attractive. That dividend is what initially attracted me to Arbor, and it is the primary reason Arbor has become one of my largest holdings. Although I first purchased shares back in November of 2007, I did not recommend it on Seeking Alpha until December of 2018 when the price was $11.29 and the $1.08 dividend was generating a 9.6% yield.
It's a quarterly dividend that has been increased a dozen times - and more than doubled - since the end of 2015 (from $0.15 to $0.33), and one that has been increased each of the last three quarters. Despite the increases, the rise in the share price has driven the forward yield down to 7.41%. Even if the company announces a dividend increase when earnings are released on May 7th, I doubt the yield will go back above the 8.25% referenced in the April article or the 9.6% yield from that first article.
Still, the recent 7.4% yield remains relatively attractive, and two events earlier this year should provide the company with sufficient capital to power more dividend increases. The first was a secondary offering of seven million shares of common stock priced at $15.48 that took place in late March. The second was a press release on May 4th announcing that it had
issued $175 million aggregate principal amount of 5.00% senior unsecured notes due April 30, 2026 in a private placement (the “Notes”).
During the company's Q1 earnings conference call management noted that it expected to generate 12%-15% on new equity offerings, with the potential to generate even higher returns if the initial loans could be converted into Agency loans serviced by the company. If it made sense to issue shares with a dividend "cost" of more than 8%, it would seem likely that the new notes which cost 5% will generate even better returns.
This should further cement the likelihood of dividend increases later this year, but just not enough to move the shares up another 15%.
Disclosures
Those that have read my prior articles are aware that I mostly write about stocks that I already own. They may also be aware that in addition to holding an investment position, I may make additional short term trades or day trades around those positions. Arbor is one of those equities where I have made a very large number such trades. While I try not to let my trading activity unduly influence the content of the articles I write on Seeking Alpha, it is certainly possible that bias can creep in.
Equally important - perhaps even more important - I may be selling a portion of a position that I am recommending and consider a core holding at any time. While this may seem counter-intuitive, one of my investment objectives it to not let a single investment do too much damage to my financial health should some sort of negative event cause a sharp drop in the price. I have arbitrarily chosen to use a soft 5% limit on any single equity, and Arbor currently is above that amount. At some point this month, it seems likely that I will sell a portion of my Arbor stake since I am anticipating more good news.
Despite trimming back Arbor in certain of my accounts, I also currently manage accounts for other family members. In those situations, I am letting the dividends be reinvested. Lastly, although I have no outstanding option positions, I have written covered calls to enhance income on certain Arbor positions in the past and may do so in the future.
Summary
Arbor certainly has an attractive dividend and those looking for dividend income should certainly take a close look at the company. And, while there is still more room for capital appreciation, I don't see the share price moving 15% higher from its current level over the next 12 months. As a result, I am reducing my Seeking Alpha rating from Very Bullish to Bullish.
This article was written by
Analyst’s Disclosure: I am/we are long ABR. 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.
I have included a detailed disclosure section in the body of the article that should be read carefully.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (30)
and,
"...the recent 7.4% yield remains relatively attractive, and two events earlier this year should provide the company with sufficient capital to power more dividend increases. "
1 year change 63.12% (distorted by the COVID-19 market melt down)
2 year change 48.68%
