If there’s one factor money buyers love, it is excessive dividend yields that may juice up portfolio returns. Shopping for high-yielding dividend shares usually works nicely — till and until the dividend will get minimize or suspended. An unusually excessive dividend yield is usually referred to as a “yield lure,” which means that whereas the yield is alluring, the declining share value is commonly a mirrored image of weak firm fundamentals and declining earnings.
One other occasion that perks investor curiosity is a inventory break up, as one can personal extra shares at a decreased inventory value. However when an organization broadcasts a “reverse inventory break up” to supply a extra engaging inventory value, it is usually an enormous purple flag that the corporate is struggling. It is not unusual for the inventory to dump on the information.
Check out one actual property funding belief (REIT) that sports activities a excessive dividend yield and not too long ago introduced a reverse inventory break up. Is that this a golden alternative or simply idiot’s gold?
ARMOUR Residential REIT Inc. (NYSE:ARR) is a Vero Seashore, Florida-based mortgage REIT (mREIT) that primarily invests in residential mortgage-backed securities (MBS) from authorities companies equivalent to Fannie Mae, Freddie Mac and Ginnie Mae.
Armour Residential REIT pays a month-to-month dividend, which many income-oriented buyers favor. However the inventory and dividend have been something however steady over time. ARMOUR traded close to $25.50 in 2017, and the dividend paid at the moment was $0.19 per 30 days. However within the years since, the inventory value has dropped precipitously. It not too long ago traded close to $4.60. The dividend was minimize as soon as in 2019, 2020 and once more in 2023.
On July 26, ARMOUR Residential introduced its second-quarter working outcomes. Non-GAAP (usually accepted accounting observe) earnings per share (EPS) of $0.23 missed the estimates of $0.26. Income of $5.8 million missed the estimates by $58.1 million and was an 83.43% lower from the second quarter of 2022.
After the closing bell on Aug. 29, ARMOUR Residential REIT introduced it can provoke a 1-for-5 reverse inventory break up, efficient at 5 p.m. Sept. 29. ARMOUR additionally introduced that its month-to-month dividend for September would stay at $0.08 per share, because it has been since March 2023, when it was decreased from February’s $0.10 per share. After the 1-5 break up takes place, the brand new month-to-month dividend will develop into $0.40 per share.
With the current annual dividend of $0.96, the yield on shares is nineteen.6%. Nevertheless, the annual dividend charge of $0.96 is identical because the ahead EPS, making a 100% payout ratio. That is purple flag No. 2. There’s little margin for security on the dividend.
By investing within the government-backed company MBS, ARMOUR minimizes its credit score dangers, however greater rates of interest create extra threat for the REIT because the unfold between what it acquires versus what it lends is squeezed. Its ebook worth has been nearly minimize in half since 2021. If the Federal Reserve continues to boost rates of interest, the ebook worth may very well be minimize even additional.
Since February 2020, ARMOUR has had a complete return of adverse 52.68%, even with its very excessive dividend yield. The quick proportion of float is now 8.84%. That’s purple flag No. 3. The closing value earlier than the break up announcement was $5.07. ARMOUR inventory dropped nearly 4% within the morning following the announcement.
ARMOUR Residential REIT seems to be idiot’s gold. The 19.6% dividend yield seems like a yield lure that can not be sustained for for much longer. The Fed’s hawkish stance on rates of interest continues to be deleterious to ARMOUR’s backside line. EPS and income have been declining since 2022. The shorts are throughout this inventory like flies on honey. And it appears that evidently the reverse break up is being met with disgust by buyers. Like a photo voltaic eclipse, buyers ought to look away from the dazzling dividend yield, lest they be blinded by its attract to the tough realities of this REIT.
Weekly REIT Report: REITs are some of the misunderstood funding choices, making it troublesome for buyers to identify unimaginable alternatives till it is too late. Benzinga’s in-house actual property analysis group has been working arduous to determine the best alternatives in at this time’s market, which you’ll achieve entry to free of charge by signing up for the Weekly REIT Report.
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This text This REIT Now Yields 19.6%: Golden Alternative or Idiot’s Gold? initially appeared on Benzinga.com
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