Amworth Mortgage Preferred "B" ANH-PB
October 14, 2008 - 8:47pm EST by
david101
2008 2009
Price: 15.00 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 15 P/FCF
Net Debt (in $M): 0 EBIT 0 0
TEV ($): 0 TEV/EBIT

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  • Preferred stock

Description

The Anworth Mortgage Asset Corporation 6.25% Series B Cumulative Convertible Preferred Stock (Yahoo symbol = ANH-PB) is a simple idea with a 10.4% current yield and 67% appreciation potential. It is also a small idea because there are only one million shares outstanding and the trading is thin. Anworth Financial is an agency mortgage real estate investment trust or amREIT.

Their business model is simple - buy agency residential mortgage-backed securities (RMBS), lever the bonds via short-term repurchase agreements (a.k.a. repos) to 7-10X equity and pay dividends.

With the Federal conservatorship of Fannie Mae and Freddie Mac, all agency RMBS enjoy government guarantees and are near to Treasuries in that regard. Thus, there is little need to delve into the minutae surrounding agency RMBS. The Feds backing the agency RMBS make them very liquid and excellent collateral for repo lenders. So the assets and liabilities from the balance sheet are copacetic. Okay, there is a nit. Repo debt is short-term, so any sudden rises in short-term lending rates can cause spreads to shrink, which has happened before (hence the importance of the cumulative feature of the preferred). To give investors an idea of the volatility on the common stock dividend, here is a recap of all their dividends since coming public in 1998:

 

21-Jul-08 $ 0.29 Dividend

28-Apr-08 $ 0.20 Dividend

20-Dec-07 $ 0.12 Dividend

25-Oct-07 $ 0.05 Dividend

27-Jul-07 $ 0.05 Dividend

26-Apr-07 $ 0.05 Dividend

27-Dec-06 $ 0.02 Dividend

27-Oct-06 $ 0.02 Dividend

27-Jul-06 $ 0.02 Dividend

26-Apr-06 $ 0.02 Dividend

23-Dec-05 $ 0.02 Dividend

27-Oct-05 $ 0.08 Dividend

27-Jul-05 $ 0.18 Dividend

27-Apr-05 $ 0.27 Dividend

29-Dec-04 $ 0.27 Dividend

27-Oct-04 $ 0.27 Dividend

23-Jul-04 $ 0.33 Dividend

28-Apr-04 $ 0.38 Dividend

29-Dec-03 $ 0.33 Dividend

28-Oct-03 $ 0.33 Dividend

24-Jul-03 $ 0.45 Dividend

29-Apr-03 $ 0.45 Dividend

27-Dec-02 $ 0.50 Dividend

19-Sep-02 $ 0.50 Dividend

19-Jun-02 $ 0.50 Dividend

29-Apr-02 $ 0.50 Dividend

18-Dec-01 $ 0.30 Dividend

31-Oct-01 $ 0.79 Dividend

31-Jul-01 $ 0.24 Dividend

30-Apr-01 $ 0.20 Dividend

31-Jan-01 $ 0.11 Dividend

27-Oct-00 $ 0.10 Dividend

29-Jun-00 $ 0.15 Dividend

30-Mar-00 $ 0.15 Dividend

30-Dec-99 $ 0.14 Dividend

29-Sep-99 $ 0.14 Dividend

29-Jun-99 $ 0.13 Dividend

30-Mar-99 $ 0.12 Dividend

30-Dec-98 $ 0.12 Dividend

2-Oct-98 $ 0.10 Dividend

29-Jun-98 $ 0.15 Dividend

 

The preferreds are par $25, pay a quarterly dividend of $1.5625 for a current yield of 10.4%. The latest dividend will be paid on 10/15, so it is trading ex-dividend. The common stock has a higher dividend but that is not sustainable. Their spreads have widened this year with the initial drop in short-term interest rates but that is reversing. As their net spreads shrink, so will the dividend. Hence, the appeal of the preferreds is their stated dividend rate. Plus, these preferreds are convertible into 2.3809 shares of common stock at $10.50. The common trades under "ANH" with a recent price of $5.93. 67% appreciation for the common would imply a price of $9.87. Technically, the common could out perform the preferred if ANH trades between $9.87 and $10.50, but the closeness of the price to the conversion price would suggest that the conversion option would have value. Thus, ANH-PB will enjoy a similar economic outcome as the common, while enjoying a set dividend, being higher in the capital structure and with a put option for any fundamental change to Anworth.

Risks:

- Inverted yield curve

- high interest rates

Catalyst

Collect 10% dividend while waiting for pricing to return to par.
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