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Jonathan Poland
Jonathan Poland
Articles (474)  | Author's Website |

Big Dividend Yield and Two Titan Investors

Jim Simons owns over a million shares, and Steven Cohen has call options on 250,000 shares

April 16, 2018 | About:

New Residential Investment Corp. (NYSE:NRZ) is a mortgage REIT with a tight trading range and an extremely generous dividend payment -- a yield that is hard to pass up right now, especially if you’re an investor who believes a correction is coming. I certainly do.

As a public company, New Residential hasn’t been put through a correction yet, nut real estate markets still look strong. The company also keeps making strategic acquisitions.

It bought Shellpoint Partners last November, a mortgage platform with origination and servicing capabilities, for $190 million net of financing. The purchase added $8 billion of unpaid principal balances (UPB) of Fannie Mae and Freddie Mac mortgage servicing rights (MSR) to the company. This is how it makes money, and it makes a lot of it. Profit margins are north of 60%, return on equity north of 25% and estimates of $1.95 per share in 2018 put the stock in solid bargain territory.

There are more acquisitions to come

In fact, the CEO Michael Nierenberg said:

“We always look for, what I would call strategic investments or strategic acquisitions that will benefit our shareholders. We continue to rate the fields for corn and we are out there in the markets and looking at everything. I mean there is nothing specific I can point today, but where we sit as a company and our success over the past few years, I would expect something to happen at some point, I just don't know when. The markets will, higher rates will likely lead to some kind of dislocation in the markets. You see the volatility in the stock market, you see rates rising. I do believe as we go through this year, if interest rates continue their upward trajectory, you are going to see more consolidation around the mortgage origination business, as origination volumes come down.”

New Residential is not a growth stock but an income investment. REITs are generally affected by changes in their payout structure (amount and payout ratio) and interest rates. As rates rise, income securities -- mainly your yield, utilities, and other higher dividend payers -- tend to fall. The offset is a growing payment. New Residential, so far at least, has increased its payout roughly every three quarters, and that could mean another one coming this year.

Management seems to be conservative in its acquisitions, and even if interest rates keep rising and new loans slow, as long as the payments continue, the dividend will too. The volatility and regulatory risks in the space will allow New Residential to pounce and acquire new MSRs at fire-sale prices.

Investors have the option to wait until next quarter to collect, which could mean the end of June. In the mean time, the May 16.00 puts at 29 cents offer a small yield that could be used as a hedge or entry point. The company is set to report earnings on May 7 with expected earnings per share of 55 cents. Buy for the dividend, stay for the high earnings yield and see if the company can turn buying discounted loan debt into shareholder value.

Disclosure: I am have no positions in NRZ.

About the author:

Jonathan Poland
I used to manage money. I still publish my thoughts on stocks here on GuruFocus, mainly on big cap companies. I rarely write about stocks that I own. Thank you for reading.

Visit Jonathan Poland's Website

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