Chimera Investment (NYSE:CIM) offer investors more than a high dividend yield: The mortgage real estate investment trust in 2014 reversed its trend of falling book value , has a comparatively stable dividend, and reported strong third-quarter numbers in which core earnings per share handsomely covered its quarterly distribution to shareholders.
Despite being smaller and having a much shorter remuneration record than its peers, Chimera remains a valid alternative to bigger and established players in the sector.
Chimera Investment has a market capitalization of only $3.3 billion, which makes the company substantially smaller than mortgage REIT peers Annaly Capital Management (NYSE:NLY) and American Capital Agency (NASDAQ:AGNC), which have respective market caps of $10.7 billion and $7.9 billion.
The mortgage REIT predominantly invests in residential mortgage-backed securities, residential mortgage loans, real estate-related securities, and other assets.
At the end of the third quarter, Chimera's investment portfolio had a total value of $17 billion, with (agency) residential-mortgage backed securities and loans accounting for 95% of assets.
Companies such as Chimera invest on a leveraged basis in mortgage securities in order to earn a profit. This is an inherently risky business, and fluctuating earnings and dividends are a big theme in the industry.
Chimera's third-quarter earnings were solid, including EPS of $0.37 versus $0.07 per share in the year-ago quarter. More importantly, Chimera reported core earnings of $0.11 per share in the most recent quarter, compared to $0.09 per share last year.
Mortgage REITs should be at least earn their dividends through core earnings. Chimera was able to comfortably cover its third-quarter payout of $0.09 per share through its core earnings.
Like other mortgage REITs, the company cut its dividend in recent years due to higher interest rate volatility and weaker sector profitability. The payout actually dropped from $0.18 per share in the third quarter of 2010 to $0.09 per share in July 2012 -- a decline of 50%.
However, Chimera's dividends have now held steady at $0.09 for 10 quarters in a row, and the company supplemented its regular cash payout with a special (nonrecurring) dividend of $0.20 per share in January 2014.
Based on a recurring dividend basis, Chimera's shares currently yield 11.1% (data courtesy of S&P Capital IQ).
Return to book value growth
Mortgage REITs faced difficulties in 2013, but most companies have staged strong comebacks in 2014, and Chimera is no exception. Its book value regained strength throughout the year, and the company reported another sequential book value jump (of 4.5%) in the third quarter. By comparison, both Annaly and American Capital Agency reported sequential book value declines in the most recent quarter.
From the end of 2013, Chimera's book value grew over three consecutive quarters, for a total of 8% to $3.50 per share.
Chimera has had problems in filing financial statements on time with the U.S. Securities and Exchange Commission, which is certainly unsettling. Also, Chimera was required to restate its financial statements from 2008-2011 due to accounting mistakes, which undermined investors' confidence and trust in the company at the time.
A poor accounting and filing game has clouded Chimera's solid value proposition. Going forward, the REIT must prove that it is indeed deserving of investors' trust, and that it is capable of delivering quality financial statements on time to regulatory authorities.
The Foolish takeaway
Investors who can see past Chimera's prior accounting and filing gaffes, however, could buy into a quality mortgage REIT play. Third-quarter earnings were solid, with continued book value growth and core earnings per share more than covering its dividend.
Chimera also has held its current dividend steady at $0.09 per share steady since 2012 when other mortgage REITs were still busy cutting their distributions. Being a reliable dividend payer has great value in times of volatility, which is why Chimera could be an interesting addition to income-oriented investment portfolios.