Is Hatteras Financial a Stock for the Long Term?

Being able to retire rich, or at least comfortable, is the goal of almost any investor. However, it's much easier said than done. In a recent Wells Fargo survey, respondents between the ages of 50 and 59 said that they had, on average, about $29,000 saved up. With pensions all but gone, and Social Security targeted for cuts in the future, it's hard to count on anyone but yourself. But $29,000 isn't going to cut it for most people, so you've got to get involved in the stock market in order to grow that nest egg. Getting in the game is the easy part; choosing the right stocks is the hard part.

Making prudent decisions
Generally speaking, I look for four traits in a retirement stock:

  1. Valuation: Investors of all ages want to make sure they're not overpaying for a stock, but this matters even more in retirement. Retirees don't have the long time horizon that younger investors have, so it's essential to make sure you don't overpay in the short term.
  2. Dividends: Most retirees need a combination of both growth and income, as they'll be depending more and more on their portfolio to help with everyday expenses. Companies that pay dividends not only offer immediate income, but they've also proven to outperform non-paying dividend companies over long periods of time.
  3. Growth: Investors love dividends, but everyone wants to see their stocks rise over time. Growth can be as big a part of your portfolio as a steady dividend. It's important to note that you don't need a high-flying stock that's going to shoot to the moon; a company that can grow and outperform the market is hard enough to find, so steady growth is highly covetable.
  4. Low volatility: Retirees want to invest in great growth stocks just as much as anyone else, but they also want to be able to rest well knowing that their portfolio won't be taking them on a roller-coaster ride. At the end of the day, most retirees would rather own a sturdy company that lets them sleep at night than a company that whips up and down with the gyrations of the market.

Although some companies are definitely more geared toward retirees, which companies you choose to invest in will be dictated largely by what you already have in your portfolio. Small, mid, and large caps can all play a role in your investing strategy, so I chose to evaluate all varieties of stocks in this regular series.

So how does Hatteras Financial stack up?
In order to check out the valuation of Hatteras Financial (NYSE: HTS  ) , we don't want to look at only its price-to-book ratio of 1.17. That may seem cheap, but really we don't know without looking at the ratio in historical context. In fact, it's about in-line with the company's average over its brief history since inception in 2007.

Hatteras Financial's dividend is 14.4%. As a residential real estate investment trust, the company distributes the large majority (more than 90%) of its earnings as a distribution to shareholders (hence the enormous dividend yield). Mortgage REITs such as Hatteras have done quite well in this low interest rate environment, but should short-term rates begin to rise, Hatteras might see a dip in earnings since it typically relies on short-term borrowing to make longer-term investments.

Next, we want to ensure that Hatteras Financial's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past three years, Hatteras Financial has grown its earnings per share by 68.4%. Fortunately, Hatteras Financial has been able to grow its earnings over the past three years, as have many REITs that rely on cheap cash from low interest rates. Of course, this doesn't mean that growth will continue. More on that below.

One of the best measures of volatility is called beta. Beta measures the impact that the movement of the stock market will have on a particular stock. For instance, a beta of 1.0 signifies that Hatteras Financial will move in tandem with the market; a beta of 2.0 means that the stock will move up twice as much as the general market, and vice versa. In this particular case, Hatteras Financial has a beta of 0.753, which is pretty low. Generally speaking, I like to see a beta below 1.2 for retirees. In this case, Hatteras Financial fits the bill.

Let's look at the competition
We've taken a look at Hatteras Financial, and maybe you think it's passed all the tests, or maybe you just don't feel comfortable with the results. Either way, it's beneficial to see how a company stacks up in its industry, because it's just as important to understand a company's competitors as it to understand that particular company. Here are Hatteras Financial's stats when compared to three of its closest competitors:

Company

Current Price-to-Book Ratio

Dividend Yield

3-Year Diluted Net Income CAGR

1-Year Beta

Hatteras Financial 1.12 14.4% 68.4% 0.8
Annaly Capital Management (NYSE: NLY  ) 1.13 14.3% 16.0% 0.5
Anworth Mortgage Asset Corp. (NYSE: ANH  ) 1.02 14.3% N/M 0.5
Capstead Mortgage Corp. (NYSE: CMO  ) 1.07 12.7% 100.1% 0.7

Source: Capital IQ, a division of Standard & Poor's.

Each company has traits to like and traits left to be desired. Either way, it's beneficial to look at the industry picture and not just Hatteras Financial in isolation.

Of course, I can't decide for you whether this is the best stock for retirement, but it has passed four of the four tests, which is pretty impressive. It doesn't necessarily mean this stock is a slam-dunk, but it has shown its ability to reward shareholders and that means it could have a place in your portfolio. Ultimately, as this company is a very cyclical residential REIT whose success depends on multiple macroeconomic factors, not to mention the housing market, you've got to be sure you're comfortable with that. High yields are terrific, but they don't always last forever.

Interested in adding any of the companies above to your watchlist? Click below to get the latest commentary and analysis.

Jordan DiPietro owns no shares in the companies mentioned. The Fool owns shares of Wells Fargo. The Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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