Rithm Capital Corp (RITM)

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Achilles Research
https://seekingalpha.com/article/4083497-new-residential-investment-love-dividend-machine?app=1&auth_param=18o5ds:1ckq53a:f7901b6bba068b02823bbc12fa5fcaac&uprof=45&dr=1#alt3

Summary

New Residential Investment just announced yet another dividend hike.

The mortgage investment company hiked its quarterly cash dividend by 4.2 percent. This is the second dividend hike in 2017.

New Residential Investment has strong dividend coverage and a low valuation.

An investment in NRZ now yields 12.48 percent.

New Residential Investment Corp. (NRZ) handed shareholders yet another dividend raise yesterday. The mortgage investment company has super strong core earnings and a large allocation of funds to interest rate-sensitive mortgage servicing rights. I continue to see New Residential Investment’s dividend potential on the back of strong core earnings as a compelling reason to buy into the income vehicle.

New Residential Investment is a high-quality mortgage investment company that has produced reliable results and consistently high core earnings backing its dividend. Taking a look at New Residential Investment’s core earnings trend in the last seven quarters reveals that the company pulled in significantly more in core earnings than it paid out in dividends. The existence of resilient core earnings over the last seven quarters (New Residential Investment pulled in an average of $0.53/share every quarter in core earnings which compares favorably to an average dividend rate of approximately $0.46/share) was the primary reason for me to suggest that the company had potential to increase its regular quarterly cash dividend, or pay shareholders a special dividend.

New Residential Investment’s dividend coverage has been robust in the last seven quarters. See for yourself.

Source: Achilles Research

New Residential Investment’s strong core earnings have now translated into a higher cash dividend for shareholders.

The company announced yesterday that its Board of Directors declared a $0.50/share dividend for the second quarter, reflecting an increase of $0.02/share, or approximately 4.2 percent. The latest dividend raise comes after New Residential Investment raised its first quarter dividend from $0.46/share to $0.48/share. In other words, shareholders got a cumulative dividend raise of approximately 8.7 percent over the company’s fourth quarter dividend, which is impressive. In fact, raising the dividend by this percentage is rather uncommon, especially for a high-yield income vehicle, and it goes to show that New Residential Investment is one of the better income vehicles.

Downgrade Negatively Affecting New Residential Investment’s Valuation In The Short Term

New Residential Investment took a bit of a beating earlier this week when a downgrade weighed on the company’s shares. Wedbush Morgan downgraded the stock from ‘Outperform’ to ‘Neutral’ and reduced its price target from $17.00 to $16.50. That said, the majority of analysts still have a positive opinion on New Residential Investment. According to MarketBeat, out of eight analysts, six analysts rate New Residential Investment’s shares a ‘Buy’ whereas two analysts rate shares a ‘Hold’. The consensus price target sits at $16.43, leaving about 2.5 percent of upside on the table.

However, New Residential Investment is an income play, first and foremost, so the limited upside is no reason in my opinion to stay away from the company. In fact, I think quite the opposite is true. The downgrade has made New Residential Investment’s shares a lot cheaper. A piece of New Residential Investment’s business costs income investors only 7.4x Q1-17 run-rate core earnings after the sell-off, while the company’s shares are throwing off a 12.48 percent dividend yield.

Your Takeaway

Yesterday’s dividend raise is an exceptionally good development for New Residential Investment’s shareholders because management has a lot of confidence in its investment portfolio and core earnings trajectory. Frankly, the dividend raise is not totally surprising because the company has had excellent dividend coverage for a while now. What is surprising, though, is that the company already hiked its dividend twice in 2017, and by considerable percentages, too. While the Wedbush downgrade (largely because of limited upside) has been a headwind for New Residential Investment’s shares this week, the company’s low valuation, strong dividend coverage stats and recent dividend hike to $0.50/share are solid enough reasons to consider New Residential Investment for an income portfolio.