What You Need to Know About Chimera

Mortgage REITs are popular with many investors right now for the high dividend yields they currently provide. Sporting a dividend yield of 15%, Chimera (NYSE: CIM  ) is certainly no exception. I even purchased a few shares of the company in a real-money portfolio I co-manage for The Motley Fool.

Mortgage REITs issue shares to investors to raise capital, which they use to buy mortgage-backed securities. They also use short-term financing to boost their returns. They repay lenders out of the mortgage payments they collect, and most of the rest is returned to shareholders in dividends.

Here’s a simple visualization:

Let’s take a quick look at four things investors in Chimera need to know. After that, we’ll see how Chimera stacks up next to its competitors.

1. Interest rate spread
A REIT’s interest rate spread is the difference between a REIT’s financing costs and its interest income. It’s a decent measure of investing profitability -- and portfolio risk.

2. Debt-to-equity ratio
Since interest rate spreads tend to be pretty narrow, REITs like to leverage those returns to generate bigger returns. Companies with safer portfolios can afford to take on more leverage risk than those with riskier investments.

3. Share growth
Since REITs have to pay out the vast majority of their earnings in dividends, the only way to grow their business is to take on more leverage or issue new shares. If a company issues a lot of shares, we want to make sure it does so at attractive prices so investors aren’t diluted.

4. Dividend yield
The main reason to buy mortgage REITs is for their dividend. The forward yield tells us what dividends we’ll get paid over the next year if earnings hold constant.

Let’s see how Chimera stacks up next to its peers in these four crucial areas:

Company

Interest Rate Spread (2010)

Debt-to-Equity Ratio

2-Year Annual Share Count Growth

Dividend Yield

Chimera

4.9%

176%

47%

15.1%

Annaly Capital (NYSE: NLY  )

2.1%

632%

22%

14.2%

American Capital Agency (Nasdaq: AGNC  )

2.3%

662%

193%

18.7%

MFA Financial (NYSE: MFA  )

3.0%

293%

26%

12.0%

Data from Capital IQ, a division of Standard & Poor’s.

Chimera has issued quite a few shares recently to help finance its portfolio without taking on too much extra leverage. Over the past two years, Chimera’s price-to-book multiple has ranged from 0.99 times to 1.39 times, suggesting it probably got decent prices for those sales.

Compared to the rest of the mortgage REIT industry, Chimera tends to buy a larger portion of riskier mortgages not backed by Fannie Mae and Freddie Mac. (At last count, about half of the company’s portfolio wasn’t backed by the two agencies.) By taking on greater risk of non-payment, it’s able to earn a higher yield on its portfolio and generate a higher interest rate spread. Chimera maintains a lower debt-to-equity ratio than its peers to compensate for that increased portfolio risk, but for the time being it’s still able to pay out a juicy dividend.

To stay up to speed on the top news and analysis on Chimera, or any other stock, add it to your stock watchlist. If you don't have one yet, you can create a watchlist of your favorite stocks.

Ilan Moscovitz doesn’t own shares of any company mentioned. The Motley Fool owns shares of Annaly Capital Management and Chimera. 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.


Read/Post Comments (3) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 24, 2011, at 8:48 AM, doug007 wrote:

    I asked something similar to this the last time you posted on CIM, without a response. So since you keep posting on CIM, I'm going to keep asking... :-)

    Any comments on why CIM has dropped from $3.92 when you bought it around $3.30? A roughly 15% loss in less than 2 months.

    What economic pressures or market sentiment has caused such sharp drop? Are they real, or just "perception"? Has Chimera materially changed since you bought it? Did they issue a huge number of new shares?

    That would be more interesting than just using CIM as a context to discuss the attributes of REITs.

    Doug

  • Report this Comment On July 24, 2011, at 3:15 PM, AUricle wrote:

    Doug,

    I won't pretend to know the true answer to your question, but as a previous CIM shareholder, let me give you my observations, and what I FEEL you might be seeing in the share/price activity.

    First my 'history' with CIM is necessary to gain my perspective

    .Briefly, bought my shares with a $3.54 avg price....a year or so ago, when the stated dividend was about 17.9%....my yield was actually in the 19% range due to a dip in price that I was fortunate to buy into.

    Fast forward about 9 mos.

    CIM projects EPS to drop to .16 (from around .19 when I bought)

    In a conversation I had at the time with a friend who was looking at CIM to purchase, I noted that, with the lowered EPS and a price about 3.95 at the time, I speculated that in order for a person to continue to get the previous stated return (17.9) the price would now have to fall into the 3.40-3.45 area, (I personally took this as my cue to EXIT my position....fortunately)...and lo and behold, the next price move took it down precisely into that area, and as I've continued to watch CIM, I see that EPS projections are now in the .14 range...another reduction, which, if I'm at all onto ANY behavioral anomoly based on something like { previous yield/price : future price/previous yield } then the price should fall further still (3.15-320??)...again, whether there is ANY valid correlation here or not, I really have no 'proof'...just 'reasonable' speculation base on observational evidence....(kind of like what one extrapolates from looking at a price chart that is showing an observable 'trend').

    Take this FWIW, but the price IS still moving down, and if I'm not mistaken, was recently bid under 3.20 (though no trade actually that low...maybe 3.25)

  • Report this Comment On July 25, 2011, at 9:19 PM, doug007 wrote:

    AUricle,

    Interesting. That's a lot more analysis that I'd seen on here regarding CIM. I was wondering if there was more too it than just Cramer yelling "sell, sell, sell".

    I was getting ready to sell when it was over 4. I have it for a year or so and enjoy the dividends, but wanted to free up some cash for other purchases. Once it started dropping I decided to just wait it out. It's not a huge position - although it's now a losing one. Bummer.

    Doug

    ps - Ilan, I'd still love to get your insight. I thought that since you bought it for your RS port you might have an opinion, theory, or analysis.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1523425, ~/Articles/ArticleHandler.aspx, 12/19/2014 1:33:52 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement