Outlook for 25%-Yielding ARMOUR Residential REIT Stock Is Robust
December 14, 2023
ARR Stock Is Well Suited for Income Investors
Real estate investment trusts (REITs) like ARMOUR Residential REIT, Inc. (NYSE:ARR) have been facing pressure since March 2022.
Why?
The 11 interest rate hikes in the U.S. since that time, from near-zero percent to the range of 5.25% to 5.5%, have made it more expensive to borrow capital and carry existing loans. This has had negative impacts on REITs’ operating margins and bottom-line profits.
On November 1, however, the Federal Reserve announced that it was pausing its interest rate increases. It’s expected that, in December, the Fed will again hold its key lending rate. Since the beginning of November, we’ve seen that just the notion that the Fed is done raising its rates has an impact on REITS.
As for 2024, an analyst at ING Economics says a 25-basis-point interest rate cut could come as early as March, followed by as many as five additional rate cuts of 25 basis points. James Knightley expects the additional rate cuts to extend into 2025 as the U.S. economy slows. (Source: “The Federal Reserve Will Cut Interest Rates 6 Times in 2024 as the Economy Shows Clear Signs of Cooling Down, ING Says,” Business Insider, November 30, 2023.)
Knightly forecasts that the federal funds rate will be about 3.83% at the end of 2024 and 2.83% at the end of 2025. That’s almost half the current rate of 5.33%.
Over the next two years, interest rate cuts would likely juice the bottom lines of beaten-down REITs like ARMOUR Residential REIT.
The company primarily invests in residential mortgage-backed securities that are issued or guaranteed by U.S. Government-sponsored organizations. The REIT also invests in interest-only securities, U.S. Treasury securities, and money market instruments. (Source: “ARMOUR Residential REIT, Inc. Company Update – November 2023,” ARMOUR Residential REIT, Inc., last accessed December 6, 2023.)
The REIT essentially raises capital through the issuing of debt. Then, it invests that capital in higher-yielding debt instruments. The company’s investments are primarily fixed-rate loans, comprising 98.7% of its portfolio.
ARMOUR Residential REIT, Inc. Increases Stock Buybacks
ARMOUR Residential REIT returns the vast majority of its earnings to investors in the form of stable, ultra-high-yield monthly dividends, as well as share buybacks.
Since its inception in November 2009, ARR stock has paid out approximately $2.0 billion in dividends.
In December 2023, ARMOUR Residential REIT announced a monthly cash dividend of $0.40 per share, for a yield of 25.4%. (Source: “Dividends, ARMOUR Residential REIT, Inc., last accessed December 6, 2023.)
In the ARMOUR Residential REIT stock chart below, it might seem like the company hiked its monthly payout by a significant amount in September, but that big jump was a result of a one-for-five reverse stock split that was completed on September 29.
Since 2013, ARMOUR Residential REIT has returned more than $282.0 million to its common shareholders through share repurchases. (Source: “ARMOUR Residential REIT, Inc. Company Update,” ARMOUR Residential REIT, Inc., September 14, 2023.)
In the second quarter, the company repurchased 425,000 shares of ARR stock for a net cost of $4.88 per share. In the third quarter, the company’s board authorized an increase in its stock-repurchase program to an aggregate of 2.5 million shares.
ARMOUR Residential REIT, Inc. is able to pay reliable, high-yield dividends and maintain an aggressive share-repurchase program because it makes a lot of money.
For the third quarter, management reported net interest income of $3.6 million and distributable earnings of $50.2 million, or $1.08 per share. (Source: “ARMOUR Residential REIT, Inc. Announces Q3 Results and September 30, 2023 Financial Position,” ARMOUR Residential REIT, Inc., October 25, 2023.)
ARMOUR Residential REIT Stock Up Month-Over-Month
If you look at ARMOUR Residential REIT, Inc.’s stock chart below, you can see the immediate impact of the Fed’s November 1 announcement about its interest rate policy. ARR stock ripped higher in the opening days of that month, and it has continued to build on those gains.
As of this writing, ARMOUR Residential REIT stock is trading at $18.88, up by about 20% month-over-month.
Despite the big gains, ARR stock is still trading below its book value of $25.53 per share.
Chart courtesy of StockCharts.com
The Lowdown on ARMOUR Residential REIT, Inc.
ARMOUR Residential REIT stock is a great mortgage REIT play that has seen its share price rebound since the start of November.
The outlook for ARR stock’s price and dividends is solid, with the Fed expected to hold interest rates steady and pivot to cutting rates in 2024. That should improve ARMOUR Residential REIT, Inc.’s profitability, juice its share price, and—hopefully—allow it to raise its monthly high-yield payouts.
