In some respects, I'm surprised with what I saw Friday from NovaStar Financial
Results for the second quarter appeared to be both solid in their own right and relative to expectations. Loan originations were up 19%, net interest income was up 51%, and loans under management grew 42%. When it all hits the bottom line, net income was up 11% and EPS was down 4% (due to increased share dilution). For those investors interested in non-generally accepted accounting principles "core earnings," per-share growth here was 77% for the quarter.
Interestingly, book value climbed 52% from the year-ago level to $16.29. While skeptics are going to retort that book value can be inflated if the asset values are overstated, it's a circular argument at some point. The presented numbers are whatever they are -- believe them or don't -- and invest accordingly.
In the quarterly report, management confirmed that it's continuing its recent dividend policy -- that is, a $1.40 quarterly dividend. The dividend policy at NovaStar is a bit more complicated than with regular companies because of its status as a mortgage REIT: NovaStar must pay out 85% of its taxable income as dividends or pay a 4% excise tax on the excess.
As a result, NovaStar has paid special dividends in the past to disgorge excess income without disrupting its regular dividend payment schedule. Within its guidance, management said it does not anticipate paying such a special dividend. Even if NovaStar ultimately underpays and is forced to pay an excise tax, the amounts involved are likely still cost-effective, and NovaStar might actually be better served by hanging on to the cash and paying the tax as opposed to borrowing money at higher rates.
This is still not a favored idea for me. I'm not a fan of the mortgage market and I have serious concerns about what will happen if or when the boom ends, the economy stalls, and defaults go up. But that's not an issue unique to NovaStar -- I personally wouldn't buy Hanover Capital
If the housing market has a soft landing and the Fed stops hiking rates before the economy hits the skids, NovaStar could come out all right and keep paying a nice dividend. But if I were going to make a play for high yields today, I'd rather look at Canadian royalty trusts and leave the mortgage REITs for other investors.
For more on NovaStar and other mortgage REITs:
Like dividends but you're not sure how to separate the winners from the losers? Let us help. Try a free trial subscription to our Motley Fool Income Investor newsletter.
Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
More from The Motley Fool
Relax! Your iPhone 6 Isn't About to Shed 40% of Its Performance
This Fool counters fiction with facts.
What Happened in the Stock Market Today
Stocks had a huge day, sending the major indexes to new records. Shares of Juno Therapeutics soared following a buyout report, and Ford slumped on disappointing guidance.
Why MercadoLibre Stock Gained 101.5% in 2017
The Latin American e-commerce leader's share price soared to new heights thanks to explosive revenue growth.