Is Armour Residential's 16.4% Dividend Yield Sustainable?

Aug. 30, 2012 - PRLog -- Armour Residential operates in the U.S. financial sector as a mortgage REIT, and seeks to invest primarily in all three types of residential mortgage backed securities (fixed rate, adjustable rate and hybrid), for which the principal and interest payments are guaranteed by a government-sponsored entity (agency). Last year in December, the board amended the company's charter, allowing the management to invest in non-agency mortgage backed securities as well. However, the company has no investments in non-agency mortgage backed securities at present. The company earns a spread between the yields it earns on its assets and the cost it pays on its borrowings.

Armour Residential's stock trades at a slight 2% premium to its book value. This is opposed to 6%, 7% and 17% premiums in case of MFA Financial, Capstead Mortgage Corporation and American Capital Agency (AGNC), respectively. The market caps of MFA Financial, Capstead and Armour Residential fall in the range of $1.4 billion-$2.9 billion, while American Capital Agency, like Armour Residential, exclusively invests in agency securities, which is why it has been chosen for the comparison.

Armour Residential REIT Inc. (ARR), like other mortgage REITs in the U.S., has been favored by the Fed's efforts to keep interest rates low. This is reflected by ARR's YTD performance of 4.4%. We are bullish on the stock due to its cheap relative valuations, effective risk mitigation strategies and its massive sustainable dividend yield of 16.4%.

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