Core EPS seemed strong to some observers, but changes in the hedge portfolio signaled weaker future earnings.
Management referenced the challenges clearly in their Q4 earnings call.
My previous estimate of book value needs a revision that increases the value materially.
ARMOUR Residential REIT (NYSE:
Many analysts and investors use Core EPS as their primary metric for assessing the sustainability of the dividend. In the last two quarters Core EPS appeared solid and provided investors with the illusion of safety in the dividend. Unfortunately, the strong performance on Core EPS was tied to a low net interest payment required on swaps relative to the amount of hedge protection ARR was carrying. The smaller net interest payment is a natural consequence of using "forward starting swaps" rather than "current pay swaps." Seeing the way forward starting swaps were rolling towards their start dates gave me reason to believe Core EPS would see a significant decline in 2016.
Usually there is a transcript on Seeking Alpha for the earnings call, but there was none for the Q4 2015 earnings call by ARR. I found an alternative edited
"Our core earnings of $1.10 a share exceeded dividends paid of $0.99 in the fourth quarter. We have...