Monthly Dividend Stock In Focus: Ellington Financial

Up to date on July 14th, 2021 by Bob Ciura

Buyers are sometimes drawn to dividend paying shares due to the earnings they produce. Dividend paying shares present earnings, even whereas the value of the inventory can fluctuate.

There are some corporations that even pay month-to-month dividends, which permit for constant money flows for traders. However there are lower than 60 shares that pay a month-to-month dividend.

You may obtain our full record of month-to-month dividend paying shares (together with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the hyperlink under:

Ellington Monetary Inc (EFC) is a Actual Property Funding Belief, or REIT, that pays a month-to-month dividend. Even higher, the inventory has a really excessive dividend yield above 10%.

In fact, high-yielding shares can typically be a warning signal that the underlying enterprise has important challenges. Shares with extraordinarily excessive yields above 10% can entice traders with dividend cuts in a while. These “yield entice” shares ought to be averted.

This text will study Ellington Monetary’s enterprise mannequin, prospects for progress, and the security of its dividend to find out if traders ought to take into account shopping for the inventory.

Enterprise Overview

Ellington Monetary solely transitioned right into a REIT initially of 2019. Previous to this, the belief was taxed as a partnership. It’s now categorized as a mortgage REIT.

Ellington Monetary is a hybrid REIT, which means that the belief is a mix of an fairness REIT, which owns properties, and mortgage REITs, which spend money on mortgage loans and mortgage-backed securities.

Ellington Monetary has a market capitalization above $900 million. You may see a snapshot of Ellington’s funding portfolio within the picture under:

Supply: Investor Presentation

Credit score securities comprise 47% of belongings, with company securities representing the bulk at 53%.

On Might 5th, 2021, Ellington Monetary reported its Q1 outcomes for the quarter ended March 31st, 2021. Because of the firm’s enterprise mannequin, Ellington doesn’t report any revenues. As a substitute, it information solely earnings. Curiosity earnings got here in at $34.2 million, a marginal 0.5% improve quarter–over–quarter, whereas core earnings per share got here in at $0.43, 16.2% larger vs. This autumn 2020 as a result of elevated portfolio yield spreads.

The corporate leveraged its sturdy stability sheet to drive progress in its excessive–yielding mortgage portfolios and opportunistically rotate its capital allocations in the direction of extra promising securities.

While its complete lengthy credit score portfolio truly decreased by 9% quarter-over-quarter as a result of shopping for small business mortgages and client loans, Ellington’s ebook worth per share elevated from $17.59 to $18.16 throughout the quarter.

Development Prospects

Ellington’s EPS technology has been fairly inconsistent over the previous decade, as charges have largely been lowering. As a consequence, its per-share dividend has additionally largely been falling since 2015.

Nevertheless, the corporate has carried out its finest to diversify its portfolio and cut back its performance variance. For instance, 74% of its RMBS publicity is allotted to 30–yr fastened mortgages.

Moreover, whereas round 51% of its credit score portfolio is invested in residential mortgages, that fifty% is break up amongst many completely different securities varieties (Non–QM,Reverse mortgages, REOs, and many others.). Ellington has taken nice care as of late to not focus its danger in too few areas, which improves financial return volatility.

Ellington has designed its portfolio in such a method that actions in charges over time gained’t have a significant impression on its general portfolio.

Nevertheless, with charge spreads constantly dropping and the inventory’s costly financing as a result of its excessive dividend ought to proceed pressuring EPS technology. To be prudent and worth within the subject, we’re forecasting EPS growth of 1% per yr by means of 2026.

Dividend Evaluation

Ellington Monetary has a unstable dividend historical past, with a number of reductions adopted by will increase. The firm minimize its month-to-month dividend from $0.15 to $0.08 in Q1 2020 as a result of pandemic, however administration has elevated it a number of occasions since then.

Within the 2021 first quarter, the corporate introduced one other improve again to $0.15 paid month-to-month, which is now on-par with the pre-pandemic dividend degree. At a degree of $0.15 per share every month, Ellington Monetary’s annualized dividend payout is $1.80 per share. We forecast FY 2021 EPS at $1.76, reflecting the corporate’s asset rotation to raised–performing belongings.

This implies the annualized dividend payout just isn’t fairly coated by underlying EPS, a problematic signal. The corporate’s DPS ought to be seen as protected in the interim. However, primarily based on DPS’ downward historic trajectory, slight decreases going ahead are doable as a result of the dangers of mortgages defaulting amid the continuing pandemic and the overall lower in rates of interest.

One constructive is that the stability sheet stays of top quality, even although Ellington’s debt–to–fairness ratio elevated from 2.6 to three.2 throughout Q1. The times of mortgage REITs using 8x or 9x leverage have come and gone, however Ellington continues to be embodying low leverage for a mortgage REIT, which ought to enhance security and cut back volatility throughout each good and dangerous occasions.

With a yield above 10%, the inventory is actually enticing for earnings traders, though a excessive degree of volatility is to be anticipated. Since its IPO, the corporate has paid cumulative dividends in extra of $27/share, which works out to greater than 1.5x its present share worth. Subsequently, it has delivered a strong earnings stream to its shareholders over time.

Closing Ideas

Excessive-yield dividend shares at all times should be thought of fastidiously because the elevated yield is commonly a warning signal of basic deterioration. Within the case of Ellington Monetary, this appears to be the case, as the corporate has exhibited quite a lot of volatility in its dividend funds.

The belief has a diversified mortgage portfolio and has confirmed profitable at rising its profitability over time. Ellington Monetary’s dividend yield additionally appears protected for now, although one other minimize might be within the providing if the belief have been to see a slowdown in its enterprise.

Buyers not trying to take elevated dangers ought to most likely keep away from Ellington Monetary inventory. That stated, Ellington Monetary inventory pays month-to-month dividends and has a double-digit yield, assuming the dividend stays intact. Buyers with the next tolerance for danger might discover Ellington Monetary a beautiful funding choice.