If there’s one thing cash investors love, it’s high dividend yields that can juice up portfolio returns. Buying high-yielding dividend stocks often works well — until and unless the dividend gets cut or suspended. An unusually high dividend yield is sometimes called a “yield trap,” meaning that while the yield is alluring, the declining share price is often a reflection of weak company fundamentals and declining earnings.
Another event that perks investor interest is a stock split, as one can own more shares at a reduced stock price. But when a company announces a “reverse stock split” to produce a more attractive stock price, it’s often a huge red flag that the company is struggling. It’s not uncommon for the stock to sell off on the news.
Take a look at one real estate investment trust (REIT) that sports a high dividend yield and recently announced a reverse stock split. Is this a golden opportunity or just fool’s gold?
ARMOUR Residential REIT Inc. (NYSE:ARR) is a Vero Beach, Florida-based mortgage REIT (mREIT) that primarily invests in residential mortgage-backed securities (MBS) from government agencies such as Fannie Mae, Freddie Mac and Ginnie Mae.
Armour Residential REIT pays a monthly dividend, which many income-oriented investors prefer. But the stock and dividend have been anything but stable over time. ARMOUR traded near $25.50 in 2017, and the dividend paid at that time was $0.19 per month. But in the years since, the stock price has dropped precipitously. It recently traded near $4.60. The dividend was cut once in 2019, 2020 and again in 2023.
On July 26, ARMOUR Residential announced its second-quarter operating results. Non-GAAP (generally accepted accounting practice) earnings per share (EPS) of $0.23 missed the estimates of $0.26. Revenue of $5.8 million missed the estimates by $58.1 million and was an 83.43% decrease from the second quarter of 2022.
After the closing bell on Aug. 29, ARMOUR Residential REIT announced it will initiate a 1-for-5 reverse stock split, effective at 5 p.m. Sept. 29. ARMOUR also announced that its monthly dividend for September would remain at $0.08 per share, as it has been since March 2023, when it was reduced from February’s $0.10 per share. After the 1-5 split takes place, the new monthly dividend will become $0.40 per share.
With the present annual dividend of $0.96, the yield on shares is 19.6%. However, the annual dividend rate of $0.96 is the same as the forward EPS, creating a 100% payout ratio. That’s red flag No. 2. There is little margin for safety on the dividend.
By investing in the government-backed agency MBS, ARMOUR minimizes its credit risks, but higher interest rates create more risk for the REIT as the spread between what it acquires versus what it lends is squeezed. Its book value has been almost cut in half since 2021. If the Federal Reserve continues to raise interest rates, the book value could be cut even further.
Since February 2020, ARMOUR has had a total return of negative 52.68%, even with its very high dividend yield. The short percentage of float is now 8.84%. That is red flag No. 3. The closing price before the split announcement was $5.07. ARMOUR stock dropped almost 4% in the morning following the announcement.
ARMOUR Residential REIT appears to be fool’s gold. The 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 deleterious to ARMOUR’s bottom line. EPS and revenue have been declining since 2022. The shorts are all over this stock like flies on honey. And it seems that the reverse split is being met with disgust by investors. Like a solar eclipse, investors should look away from the dazzling dividend yield, lest they be blinded by its allure to the harsh realities of this REIT.
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This article This REIT Now Yields 19.6%: Golden Opportunity or Fool’s Gold? originally appeared on Benzinga.com
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