Month-to-month Dividend Inventory In Focus: ARMOUR Residential REIT

Up to date on September 6st, 2023 by Felix Martinez

ARMOUR Residential REIT Inc. (ARR) is a mortgage Actual Property Funding Belief (mREIT) that provides an interesting 14.2% dividend yield, making it a excessive dividend inventory.

ARMOUR Residential additionally pays its dividends on a month-to-month foundation, which is uncommon because the overwhelming majority of corporations that pay a dividend, pay them quarterly or semi-annually.

There are at present over 80 month-to-month dividend shares in our protection universe. You possibly can obtain our full checklist of month-to-month dividend shares (together with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the hyperlink beneath:

ARMOUR Residential’s excessive dividend yield and month-to-month dividend funds make it an intriguing inventory for dividend traders, though its dividend funds have been declining through the years.

As with many high-dividend shares yielding over 10%, the sustainability of the dividend is in query. This text will analyze the funding prospects of ARMOUR Residential.

Enterprise Overview

As an mREIT, ARMOUR Residential invests in residential mortgage-backed securities that embrace U.S. Authorities-sponsored entities (GSE) equivalent to Fannie Mae, Freddie Mac. It additionally consists of Ginnie Mae, the Authorities Nationwide Mortgage Administration’s issued or assured securities backed by fixed-rate, hybrid adjustable-rate, and adjustable-rate residence loans.

It additionally consists of unsecured notes and bonds issued by the GSE and the USA treasuries, cash market devices, and non-GSE or authorities agency-backed securities.

The mortgage REIT was based in 2008 and is predicated in Vero Seashore, Florida. It seeks to create shareholder worth by cautious funding and threat administration practices that produce present yield and superior risk-adjusted returns over the long run.

With a market cap of roughly $1 billion and ~$107.6 million in annual income, it’s a important nationwide participant in residential funding.

Supply: Investor presentation

The belief makes cash by elevating capital by issuing debt in addition to most well-liked and customary fairness after which reinvesting the proceeds into higher-yielding debt devices.

The unfold (i.e., the distinction between the price of capital and the return on capital) is then largely returned to frequent shareholders through dividend funds, although the belief usually retains a bit of little bit of the income to reinvest within the enterprise.

Development Prospects

Latest outcomes at ARMOUR have been blended. The belief was severely impacted by the COVID-19 pandemic, however was capable of meet all of its margin calls and it maintained entry to repurchase financing.

ARMOUR Residential REIT, Inc. (ARR) reported its unaudited second-quarter 2024 monetary outcomes and monetary place as of June 30, 2024. The corporate reported a GAAP web lack of $51.3 million or $1.05 per share for frequent stockholders. Nevertheless, distributable earnings for the quarter had been $52.5 million, equal to $1.08 per frequent share. The corporate paid dividends of $0.24 per frequent share every month, totaling $0.72 for the quarter. ARMOUR’s financial web curiosity unfold was 2.05%, with common curiosity earnings at 5.00% and common curiosity expense at 5.52%.

As of June 30, 2024, ARMOUR’s ebook worth per frequent share stood at $20.30, down from $22.07 on March 31, 2024, reflecting the quarter’s web loss and dividends. The corporate’s liquidity was sturdy, with $630.2 million in money and unencumbered securities. ARMOUR’s company mortgage-backed securities (MBS) portfolio amounted to $8.9 billion, and its repurchase agreements totaled $7.1 billion. The corporate’s debt-to-equity ratio was 6.09:1, and together with TBA Securities, its implied leverage reached 7.44:1.

In an organization replace, as of July 22, 2024, ARMOUR had 48.8 million frequent shares excellent and an estimated ebook worth per share of $20.37. Liquidity was over $553 million, with extra MBS receivables of $98.1 million. The overall securities portfolio was valued at $10.4 billion. ARMOUR’s debt-to-equity ratio elevated barely to six.5:1, with implied leverage rising to 7.8:1. The corporate additionally processed the dismissal of the JAVELIN Mortgage Funding Corp. shareholder litigation enchantment in July 2024.

Supply: Investor presentation

ARMOUR’s money circulate has been risky since its inception in 2008, however that is to be anticipated with all mREITs. Of late, declining spreads have damage earnings whereas the financial disruption brought on by the coronavirus outbreak disrupted the enterprise mannequin, resulting in a pointy decline in money circulate per share, in addition to a steep dividend minimize. Luckily, ARMOUR is now seeing a measure of restoration, and will proceed to see that restoration present itself within the coming quarters and years. Transferring ahead, we count on the corporate to develop slowly, although it’ll possible take a very long time for them to rebuild to earlier ranges of ebook worth and earnings energy.

Threat Issues

Whereas there have definitely been some constructive developments at work for ARMOUR, there are nonetheless a number of dangers to be involved about. ARMOUR’s high quality metrics have been risky given the efficiency of the belief as charges have moved round over the years. Gross margins have moved down since quick–time period charges started to rise meaningfully a few years in the past, though it seems most of that harm has been carried out.

Steadiness sheet leverage had been moving down barely, however it noticed an uptick once more this previous quarter. Nevertheless, we don’t forecast a important motion in both path from this level. Curiosity protection has declined with spreads but additionally seems to have stabilized, so we’re considerably optimistic shifting ahead whereas maintaining in thoughts the numerous potential for volatility.

ARMOUR was going through headwinds from the coronavirus outbreak and an total financial downturn. In consequence, a steep dividend minimize was essential to protect the stability sheet and permit the REIT to reposition itself for survival and future progress.

The annualized dividend payout of $2.88 per share will characterize 75% of the corporate’s EPS (we estimate 2024 EPS of $4.18). This can be a concern because the payout ratio is excessive, and the dividend could possibly be liable to additional discount if EPS falls or stays at this stage for too lengthy.

For instance, if the economic system had been to enter recession, mortgage defaults may surge, resulting in steep losses. Given the unsure macroeconomic outlook, this threat is related for traders.

Last Ideas

ARMOUR Residential’s excessive dividend yield and month-to-month dividend funds make it stand out to high-yield dividend traders. Nevertheless, we stay cautious on the inventory particularly in mild of the a number of dividend cuts in recent times.

Whereas the belief is ready to cowl its dividend at present, declining rates of interest may proceed to power the belief ever additional out on the chance spectrum to take care of its money flows as its older mortgages roll off the stability sheet. This units it up for probably steep losses if the economic system had been to slide right into a recession.

Subsequently, ARMOUR inventory carries notably greater ranges of threat. This makes the funding extremely speculative proper now, particularly for risk-averse earnings traders equivalent to retirees. In consequence, we encourage risk-averse traders to look elsewhere for sustainable and rising earnings.

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