MFA Financial (NYSE:MFA), a real estate investment trust that invests in mortgage loans, looks very appealing now as an investment vehicle. As it has recently reinstated a quarterly dividend, MFA stock now has an attractive 7% dividend yield.
Moreover, the dividends, albeit much lower than before, are now fully covered, unlike before, by quarterly earnings.
On Aug. 6, MFA Financial declared its quarterly earnings of 19 cents per share for MFA stock. The company also reduced leverage, generated liquidity, and stabilized its financial position by raising capital.
The company declared a 5 cents per share quarterly dividend payable on Oct. 30 to shareholders of record on Sept. 30. This was after the company had missed a quarterly dividend.
Click to Enlarge
Source: Mark R. Hake, CFA
Moreover, the new dividend is significantly lower than the prior dividend of 20 cents per share. But now the dividend is well covered by the company’s earnings, so I suspect that it will continue at that level.
The bottom line is that the 20 cents annualized dividend provides investors a dividend yield of over 7%. This makes the stock very attractive.
The Dividend Will Likely Rise
Looking at the graph of the quarterly dividends and the dividend yield shows that MFA stock’s average dividend yield has been fairly stable. Over the past four years up until 2020, it averaged about 10.5%.
Now, even though the company set its dividend at 5 cents per share, or 20 cents annualized, I suspect it will not keep the dividend there for long. This is because the company made 19 cents per share in earnings in the past quarter. And don’t forget, as a REIT, it is required to pay 90% of our taxable income in the form of dividends.
In addition, it is required to pay an excise tax to the extent that we do not declare at least 85% of the required distribution during the current year. Now, this can include preferred dividends. MFA’s preferred dividends work out to about 6.5 cents per share. Finally, the company has up to a year to pay out 90% of its income in dividends.
Therefore, going forward, if MFA continues to make 19 cents per share in earnings or 76 cents per share for the year, it will have to increase its dividends. This is because if it stays at 5 cents quarterly or 20 cents annually, it will have paid out only 26.3% of its earnings. Even with the 6.5 cents in preferred dividends, the total will only be 34.8%.
Calculating MFA Stock’s Value
Using this information, we can estimate MFA stock’s implied value. For example, if it pays out 64.6 cents per share or 16.15 cents per quarter, it will be at 85%. The remaining 6.5 cents preferred would take it to a payout of 93.5%.
If we divide 64.6 cents by the stock’s average yield of 10.5% (see above), the target price is $6.17 per share. That represents a gain of more than 120%.
Let’s say MFA increases the dividend to just 62 cents annually, or 15.5 cents quarterly. This is lower than the previous year’s 20 cents. But it gets the payout to 90% if you add in the preferred dividends. This puts MFA’s value at $5.92 per share.
By the way, there is no guarantee that EPS will stay at this lower rate of 19 cents per share. It could rise or fall. In fact, the company made a point in its presentation that the majority of its earnings were not made from the net interest rate spread. That spread was zero during most of the quarter. On the other hand, the company had huge one-time fees in relation to its forbearance issues and capital raise costs.
However, there is another valuable point on the side of investors in MFA stock. At $2.85 the stock is selling for just 63% of the company’s $4.51 per share book value. Even using what it calls economic value, which adjusts for market value of its mortgage loan assets, the value is $4.46 per share. The stock is just 64% of that value.
In other words, if MFA stock were to rise to economic value, the gain would be 56.5%. For these reasons, I think MFA represents good value for most investors.
The post A Reinstated 7% Dividend Makes MFA Financial Attractive appeared first on InvestorPlace.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.