Almost a 12 months in the past, I analyzed the dividend security of mortgage actual property funding belief (REIT) New Residential Funding Corp. In September 2021, I stated the corporate’s dividend had a average danger of being lower as a result of firm’s historical past of decreasing the dividend and its declining web curiosity revenue (NII).
As of Monday, the corporate modified its title to Rithm Capital (NYSE: RITM). It’ll now handle the enterprise internally, fairly than have exterior managers handle the portfolio.
The dividend security score has been downgraded, however that has extra to do with previous efficiency than what is predicted.
This 12 months, NII – the measure of money move we use for mortgage REITs – is predicted to soar. For the total 12 months, Wall Road forecasts NII to return in at $1.6 billion.
That’s the highest quantity in years. Mortgage REITs usually make more cash when rates of interest are larger, so it’s no shock that NII is projected to extend as charges come off historic lows.
Rithm presently pays a $0.25 per share quarterly dividend, which comes out to a 9.3% yield.
The corporate shouldn’t have any drawback overlaying the present dividend if its NII is close to the $1.6 billion forecast. It may even elevate the payout considerably, as it’s anticipated to pay shareholders $476 million in 2022.
The issue is the corporate’s new title received’t shake off the stink of the previous couple of years.
The corporate slashed its dividend by 90% in 2020 from $0.50 per share to $0.05. Even after a number of dividend will increase, the present dividend is half of what it was two years in the past.
That tells us that when the going will get robust, administration cuts the dividend.
Final 12 months’s payout ratio was additionally too excessive at greater than 100% of NII. With NII anticipated to spike this 12 months, that’s much less of an issue, however it does present that administration overextends itself infrequently.
This 12 months appears to be like to be an excellent 12 months, however it wouldn’t shock me if the corporate will get forward of itself once more and boosted the dividend to unsustainable ranges because it has previously.
I don’t anticipate a dividend lower within the fast future. However the firm has confirmed that it doesn’t do an excellent job of managing the dividend.
Buyers ought to obtain their anticipated dividend within the fast future, however previous that, there’s an excellent probability Rithm Capital must lower once more.
Dividend Security Ranking: D
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Good investing,
Marc