Hatteras Financial: Another Sequential Book Value Gain Sets This Mortgage REIT Apart

Hatteras Financial has delivered three sequential book gains and another quarter of strong core earnings, which makes bottoming dividends ever more likely.

Jul 24, 2014 at 12:17PM
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Source: Company

Hatteras Financial Corporation (NYSE:HTS) has been the latest mortgage REIT to report quarterly earnings before the true sector heavyweights Annaly Capital Management (NYSE:NLY) and American Capital Agency Corporation (NASDAQ:AGNC) will report their quarterly performances next week.

With strong core earnings that cover its dividend, another quarter of sequential book value growth and bottoming dividends, Hatteras Financial is a solid mortgage REIT investment which has much more potential to deliver pleasant surprises in the quarters ahead.

Though Hatteras Financial managed to squeeze out a slight book value gain in the most recent quarter, the results were not as impressive as the ones for CYS Investments earlier this week, but the company has produced growth where others didn't during tumultuous 2013. That alone is worthy of recognition.

Quarterly results
Yes, it is all about the book value.

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And Hatteras Financial certainly doesn't have to hide when it comes to consistent book value growth at a time when other mortgage REITs shocked investors with substantial losses and a series of dividend cuts.

Hatteras Financial now reported its third consecutive quarter of book value growth: A strong performance given the uncertainty in the mortgage REIT sector in 2013 and the loss of investor confidence in sustainable dividend streams.

In addition to another differentiating, quarter-over-quarter increase in its book value per share, Hatteras Financial reported a second quarter core EPS of $0.63, which handsomely covers the quarterly dividend of $0.50 per share.

Furthermore, Hatteras Financial further reduced its leverage from 6.3:1 in Q1 2014 to 6.2:1 in Q2 2014 on a GAAP basis, and its effective leverage from 7.7:1 in Q1 2014 to 7.4:1 in the most recent quarter.

Leverage reductions are an ongoing theme in the mortgage REIT sector and reducing balance sheet risk in a time of interest rate uncertainty is certainly a prudent approach to risk management.

Valuation
Compared against mortgage REITs Annaly Capital Management and American Capital Agency, Hatteras Financial has a similarly large discount to book value of approximately 9%.

Discounts to book value have been a common occurrence in the sector ever since mortgage REITs have hurt investors by cutting their dividends.

A return to dividend growth, however, should attract new buyers to the mortgage REIT sector and should also lead to a sizable uptick in the valuation of Hatteras Financial.

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Dividends
Similar to other mortgage REITs such as CYS Investments or Annaly Capital Management, Hatteras Financial's dividends appear to have bottomed.

The company has declared a second quarter dividend of $0.50 per common share, which follows two prior dividend payments of the same amount.

Both Hatteras Financial's increase in its quarterly book value as well as stabilizing dividends are strong signals that the mortgage REIT is doing all the right things in managing its investment portfolio.

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Hatteras Financial currently offers investors a 10% yield, which is at the lower end of the yield spectrum of the peer group. However, dividend yields are a barometer as to how risky investors perceive the mortgage REIT to be.

Generally speaking, very high dividend yields imply a higher risk of dividend adjustments whereas lower yields increase confidence that the company can maintain its dividend payout.

Given that Hatteras Financial's dividend per share is covered by its core earnings per share, investors are unlikely to see a dividend cut in the short-term.

The Foolish Bottom Line
Hatteras Financial presented another solid quarter in terms of performance.

Its record of sequential book value growth sets the company apart from other companies in the sector, which continued to suffer losses throughout the second half of 2013 including Annaly Capital Management and American Capital Agency.

With a 10% dividend yield and strong core earnings, Hatteras Financial has a lot more potential to deliver value for shareholders in the coming quarters.

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Kingkarn Amjaroen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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