Let's face it: Some stocks are simply not for the faint of heart. Mortgage REIT Chimera Investment (NYSE:CIM), offering a unique combination of opportunity and risk, is certainly one of them. On one hand, the company pays an absolutely monster dividend yield of 14% and trades for a nearly 20% discount to book value. But on the other hand, the company has failed to file its 2011 annual report as well as a slew of quarterly updates.
While this isn't necessarily fatal, it's extremely ominous and adds a significant amount of uncertainty to any valuation of the company. It follows that investing in Chimera isn't for the faint of heart and should only be undertaken by those comfortable with the heightened degree of risk. Two of the primary risks Chimera faces right now are uncertainty and profitability.
With those missing financial statements in mind, it should come as no surprise that the biggest risk towering over Chimera involves the uncertainty about its financial health. It's now been over a year since investors have seen anything but a cursory financial update from Chimera. The last time it filed its mandatory disclosures was in August of 2011. In the meantime, it's failed to file four quarterly statements and its 2011 annual statement, prompting the New York Stock Exchange to threaten to delist it this coming January.
To make matters worse, Chimera informed investors that due to a "material weakness in internal controls," it must restate all of its financial statements going back to the third quarter of 2008. This includes effectively every financial statement that it's filed as a publicly traded company, as it didn't go public until the end of 2007. To put it in Chimera's own words, any quarterly or annual report filed over the last four years "should no longer be relied upon."
For investors, this leaves a giant black hole of uncertainty on two different levels. First, there's the question of whether Chimera will file its financial documents in time to avoid being delisted by the NYSE -- this is assuming, of course, that the NYSE doesn't extend the deadline, as it has in the past. According to a report filed by Chimera at the beginning of September, the company has until January 15, 2013 to submit the necessary paperwork subject to the NYSE's "reassessment on an ongoing basis." Later in the same report, however, Chimera claims that while it's "working diligently" to meet this timeline, "no assurances can be given" that it will succeed at doing so.
The second level of uncertainty relates to its current financial condition. While some of the concern was arguably alleviated when Chimera recently announced that its GAAP book value is $3.08 per share, or only 8% less than it was when it last reported in 2011, the ultimate proof is in the pudding. In other words, investors won't truly know how well Chimera is faring until it releases its full array of financial documents.
Profitability and dividends
If and when the company ultimately files its financial statements, the most important aspect beyond the company's estimate of book value is its profitability. Make no mistake about it, Chimera is a dividend stock, and in the absence of profits, it can't fund its generous dividend payout.
While the interest rate environment has been particularly conducive to mREITs since the financial crisis -- at one point, industry leader Annaly Capital Management's (NYSE:NLY) interest rate spread had quadrupled from pre-crisis levels -- this gap has since begun to contract, squeezing bottom lines across the industry. In the last 12 months, for instance, Annaly has seen its interest rate spread sliced in half, leading it to cut its dividend by nearly 23% since the second quarter of 2011.
In Chimera's case, we know very little about how it's faring in the current environment, to say nothing of the past year. When it last reported in the middle of 2011, its interest rate spread was 4.88%, or more than twice that of Annaly's. Since then, however, it's really anyone's guess. The most we can say is that it's decreased its dividend from $0.13 at the time of its last full financial disclosure to $0.09 today -- this equates to a 31% decrease compared to Annaly's 17%. Consequently, while it seems safe to say that Chimera's profitability has decreased substantially, it's currently impossible to say by how much.