CYS Investments Inc (CYS): Dividend Upsets in Mortgage REITs

Besides, since the securities adjust their coupon payments on every reset date, their book values are least exposed to changes in the interest rates. So, in the coming future, the company is expected to benefit two fold because of the large concentration in adjustable-rate securities.

Excess capital could be a headwind for profitability

CYS Investments Inc (NYSE:CYS)’ announcement did not surprise the market as it was already expected to maintain its prior dividend rate of $0.34 per share. Barclays expects the stock to increase its dividends over the next three quarters and to be able to generate solid double-digit returns. A large number of repo counterparties and excess capital are among the key factors that will protect CYS Investments Inc (NYSE:CYS) from the volatile interest rates.

Currently, management is holding about 833 bps in equity for Agency MBS haircuts, prepayments, accrued interest rates, and volatility in MBS prices. This implies that it’s utilizing only 67% of its equity and maintaining 33% of total capital as excess liquidity. Given the volatility in the markets, the strategy makes sense, but it’s hindering profitability at the same time.

Conclusion

The recent dividend announcements have caused mREITs to rally. However, I believe this should be temporary. mREITs are faced with considerable volatility, which will cause them to report book value erosion. Therefore, investors looking to expand their regular income must make a decision after looking at the mREIT’s future strategy.

The article Dividend Upsets in Mortgage REITs originally appeared on Fool.com and is written by Adnan Khan.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.