A 9% Yield That Has Me Concerned… Again

A little less than a year ago, I covered income investor favorite New Residential Investment Corp. (NRZ). In years past, the stock paid a generous dividend that reached as high as $2 per share per year, which provided shareholders with a double-digit yield.

Then the COVID-19 pandemic hit, and the company slashed its $0.50 per share quarterly dividend all the way down to $0.05.

That drastic cut, along with plunging net interest income (NII), garnered New Residential an “F” rating for dividend safety last year.

NII is the difference between what a mortgage real estate investment trust (REIT) makes from lending money and what it costs to borrow money, minus expenses. When we analyze the dividend safety of a mortgage REIT, NII is the most important factor.

After New Residential’s NII got a giant haircut, even before the pandemic, it rose in 2020. This year isn’t looking as good.

In 2017, NII hit a recent high of $1.23 billion. It dipped the following year to $1.02 billion and then plunged to $579 million in 2019.

NII rebounded slightly last year to $665 million. There are no forecasts for this year, though through the first half of the year, NII totaled just $217 million. The trailing 12-month total is $581 million. We’ll see where NII ends up for the full year, but it appears to be declining again.

The dividend is moving in the right direction, though it is still only half of where it was two years ago and lower than it was six years ago.

New Residential's Dividend Has a Long Way to Go

The good news is that, even with NII sliding, the company can still afford its dividend for the time being.

Last year, New Residential paid $333.5 million in dividends. This year, it’s forecast to pay $400 million, which is still below the trailing 12-month NII and the annualized figure for the first half of the year.

The two problems are that NII is falling and that New Residential has a management team that has shown it will hit the panic button on the dividend. If 2021’s NII total is worse than expected or if it is not forecast to rebound in 2022, we could see another cut.

The numbers are fine for now, but there are concerns.

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