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ARMOUR Residential REIT: Why Cut Dividends Once When You Can Cut Twice?


ARMOUR Residential REIT is sliding after disappointing shareholders in the earnings release.

Core EPS was $.72, but investors shouldn’t overemphasize the Core EPS figures.

My estimate of sustainable yield using heavy hedging and moderate to aggressive leverage is 8% to 10% on book value.

ARR is still paying around 11% on book value, but they are using a more aggressive portfolio position.

From intraday prices of $19.99 for ARR and $10.30 for NLY, I’m predicting slightly stronger performance by ARR in the near future.

ARMOUR Residential REIT (NYSE:ARR) disappointed shareholders by reporting weak book value for the end of Q1 and a cut in the monthly dividend rate. The market reacted by dropping shares quickly. The exodus brought a slide of 5% to 6% within the first few hours of trading. The broad equity market and the mREIT sector were both off in early trading which reinforced the message that the stock market is currently trading the sector with the S&P 500. Since the S&P 500 is trading with oil, we end up with mortgage REITs trading with oil. When you put those factors together, you can see an illogical market that will punish ARR beyond reason.

Disclosing My Interests

I've been regularly disclosing that I may buy preferred shares in any mREIT. Due to the yield on the preferred shares and an understanding of the changes in the hedging techniques, ARR is one of the mREITs on my list. I have multiple open orders on the preferred shares at different points. I deliberately keep these bids from showing up on some screening techniques. I generally avoid pointing out which preferred shares I'm hunting because if followers put in their own orders, it will virtually eliminate my odds of getting execution since I put out lowball offers and hope for poor liquidity to let me get execution when other buys are absent.

Core EPS

Core EPS came in at $.72. I don't think investors should get too focused on the Core EPS from one quarter to another. It is one useful metric but it has some severe shortcomings. I've been telling investors for weeks that the current environment leaves mREITs able to generate sustainable levels of returns on book value ranging from 8% to 10%.

Book Value

The earnings report included the words "book value" precisely 3 times. Each referenced book value for April 29th, 2016 (which was $25.52) rather than the end of the quarter. Common shareholders' equity per share (equivalent to book value per share) was $24.48 per share at the end of Q1.

Simple Dividend Math

The dividend was cut from $.33 to $.27 and then to $.22. I warned investors frequently...