Buy, Sell, or Hold: Chimera Investment

When considering any stock for your portfolio, don't be swayed by just the positives. Examine its pros and cons, and decide whether its possible upside outweighs its risks. Let's take a look at Chimera Investment (NYSE: CIM  ) today and see why you might want to buy, sell, or hold it.

Founded in 2007 and based in New York City, Chimera is a mortgage REIT (real estate investment trust). It invests in residential mortgage-backed securities, residential and commercial loans, and a range of other assets, and it does so by using a lot of borrowed money. As a REIT, it's required to pay out at least 90% of its income to shareholders.

Chimera stock is up 9% over the past year, but over the past four years, it has lost money for investors.

Buy
The most obvious attraction for Chimera Investment is probably its dividend, which recently yielded an eye-popping 13.2%. (Yes, you read that right.) Normally, when I discuss a stock with such a steep yield, I warn of possible dividend reductions. Well, they've already happened at Chimera --  and of course could happen again. The company paid out twice as much in dividends back in 2010. Still, even if the current payout falls by half again, a yield above 6% would remain attractive.

Another reason to consider buying Chimera is if you favor its business model. It has many peers in the mortgage REIT (or "mREIT," to those in the know) business, but its model differs from that of many key players. While mREITs such as Annaly Capital Management (NYSE: NLY  ) , American Capital Agency (Nasdaq: AGNC  ) , and Armour Residential (NYSE: ARR  ) invest in securities backed by the Fannie Mae and Freddie Mac agencies, Chimera focuses on riskier fare. Lest that seem senseless to you, know that the company also takes on less leverage, so the proposition isn't quite as risky as it may seem. Still, over the past year, the other three companies have seen their stock rise by double digits, outperforming Chimera.

Sell
A big reason to consider selling Chimera, or to not buy, is the fact that it has been late in filing its 2011 annual report and other reports. Its explanation is that it's experiencing accounting problems tied to the considerable assets it holds that are now classified as "junk," which once held higher ratings than that. That's a big deal, since you need financial statements, and reliable ones, if you're to assess the attractiveness and health of a company.

Management secured a filing extension recently, and noted, "...the Company's consolidated financial statements included in its previously filed [10-K annual reports for 2008, 2009, and 2010, as well as 10-Q reports for quarters ending September 30, 2008 through September 30, 2011] need to be restated and can no longer be relied upon." Yikes, eh? To reassure, management added, "The restatement is not expected to affect the Company's previously reported GAAP or economic book values, actual cash flows, dividends and taxable income for any previous period."

It's also worrisome that in recent years, while paying out gobs of money in dividends -- indeed, more than it was earnings -- Chimera also sold many new shares, effectively diluting their value. That's not so good for shareholders. (My colleague John Maxfield offers a telling graph to illustrate the problem.)

Want more worries? There's the power of eminent domain, by which the government might conceivably buy loans back from mREITs in order to restructure the loans and decrease the number of underwater loans out there.

Even if all the above issues didn't exist, here's another possible headache: rising interest rates. The whole model of successful mREITs involves them borrowing money at (ideally) low short-term interest rates and then buying loans or other securities with higher rates that deliver profits. We've been in a very low-interest rate environment for a long time now, but it won't last forever. Still, it's the spread between the borrowing rate and the rates of the securities investments that's of most importance, and the mREITs may be able to control their own fates to some degree, such as by managing their leverage levels.

Hold (off)
Given the reasons to buy or sell Chimera, it's not unreasonable to decide to just hold off. You might want to wait, for example, for it to file its 2011 annual report and to make sure that you like what you see in it.

If the dividend attracted you most to Chimera, you might look at alternative dividend payers, such as Philip Morris International (NYSE: PM  ) , which recently yielded 3.7% and offers the relative stability of customers literally addicted to its wares. It operates outside the U.S., where the ranks of smokers are shrinking and legislative restrictions are threatening tobacco profits.

The verdict
I'm not buying shares of Chimera any time soon. (Though I do own a few shares of Annaly Capital Management.) It may perform spectacularly in the coming years, but there are plenty of other compelling stocks out there. Everyone's investment calculations are different, so, do your own digging and see what you think.

To learn about the other risks facing mREITs and to see whether your dividends are safe, check out our recently released in-depth report on Annaly Capital Management. Among other things, it identifies three critical factors that every current and prospective investor in Annaly should be aware of. The report also comes with a year of updates. To get your investing edge, simply click here.

Longtime Fool contributor Selena Maranjian, whom you can follow on Twitter, owns shares of Annaly Capital Management, but she holds no other position in any company mentioned. Click here to see her holdings and a short bio. The Motley Fool owns shares of Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management. The Motley Fool has a disclosure policy.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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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 October 02, 2012, at 11:36 AM, plange01 wrote:

    buy chimera ahead of its dividend payout then if it rises sell and take profits and wait for a better entry point to buy it back as its next dividend nears...

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