If there’s one thing investors love, it’s high dividends that can boost portfolio returns. Buying high-yielding dividend stocks often works well—as long as the dividends are reduced or suspended. An unusually high dividend yield is sometimes referred to as a “yield trap,” meaning that even if the yield is attractive, a decline in share price often indicates weak company fundamentals and declining earnings.
Another event that benefits the investor’s interest is a stock split, as one can hold more shares at a reduced share price. But when a company introduces a “reverse stock split” to produce a more attractive stock price, it’s a big red flag that the company is struggling. Selling stocks on the news is not uncommon.
Take a look at one real estate investment trust (REIT) that has a high dividend yield and recently announced a reverse dividend. Is this a golden opportunity or just fool’s gold?
ARMOR Residential REIT Inc. (NYSE:ARR) is a Vero Beach, Florida-based mortgage REIT (mREIT) that primarily issues residential mortgage-backed securities (MBS) from government agencies such as Fannie Mae, Freddie Mac and Genie Mae.
Armor Residential REIT pays a monthly dividend that many income-oriented investors prefer. But the stock and dividends have been anything but stable over time. ARMOR traded around $25.50 in 2017, and the dividend paid at the time was $0.19 per month. But in the years since then, the share price has fallen sharply. It recently traded around $4.60. The dividend was cut once in 2019, 2020 and again in 2023.
On July 26, ARMOR Residential announced its second quarter operating results. Non-GAAP (generally accepted accounting practice) earnings of $0.23 missed estimates of $0.26 per share (EPS). Revenue of $5.8 million missed estimates by $58.1 million, down 83.43 percent from the second quarter of 2022.
In the year After the closing bell on August 29, ARMOR Residential REIT announced that it will initiate a 1-for-5 reverse stock split effective September 29 at 5 p.m. ARMOR announced that its monthly dividend for September will remain at $0.08 per share. As of March 2023, down $0.10 per share from February. After the 1-5 split, the new monthly dividend will be $0.40 per share.
The current annual dividend is $0.96, the stock’s yield is 19.6%. However, the $0.96 annual dividend is the same as the forwarder’s EPS, creating a payout ratio of 100%. That’s red flag number 2. There is a small margin for safety at the dealer.
By investing in government-sponsored agency MBS, ARMOR reduces its credit risk, but higher interest rates squeeze the spread between borrowers and lenders, creating more risk for REITs. From 2021, the price of the book has been cut in half. If the Federal Reserve continues to raise interest rates, the book’s value could fall further.
Since February 2020, ARMOR has a negative total return of 52.68% despite its very high dividend yield. The float’s short percentage is now 8.84%. That’s red flag number 3. The closing price prior to the announcement of the split was $5.07. ARMOR stock fell about 4% in the morning following the announcement.
ARMOR Residential REIT looks like fool’s gold. A 19.6% dividend yield looks like a yield trap that cannot be sustained for much longer. The Fed’s hawkish stance on interest rates continues to be destructive to ARMOR’s bottom line. EPS and earnings have been declining since 2022. The shorts are like honey flies on this stock. And reverse splits seem to be frowned upon by investors. Like a solar eclipse, investors should look away from the impressive dividend yield to avoid being blinded by the charm of this REIT’s harsh realities.
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This column This REIT Now Yields 19.6%: Golden Opportunity or Fool’s Gold? It appeared at first Benzinga.com
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