Monthly Dividend Stock In Focus: Ellington Financial - Sure Dividend

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Monthly Dividend Stock In Focus: Ellington Financial


Updated on July 14th, 2021 by Bob Ciura

Investors are often attracted to dividend paying stocks because of the income they produce. Dividend paying stocks provide income, even while the price of the stock can fluctuate.

There are some companies that even pay monthly dividends, which allow for consistent cash flows for investors. But there are less than 60 stocks that pay a monthly dividend.

You can download our full list of monthly dividend paying stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:

 

Ellington Financial Inc (EFC) is a Real Estate Investment Trust, or REIT, that pays a monthly dividend. Even better, the stock has a very high dividend yield above 10%.

Of course, high-yielding stocks can often be a warning sign that the underlying business has significant challenges. Stocks with extremely high yields above 10% can trap investors with dividend cuts later on. Those “yield trap” stocks should be avoided.

This article will examine Ellington Financial’s business model, prospects for growth, and the safety of its dividend to determine if investors should consider buying the stock.

Business Overview

Ellington Financial only transitioned into a REIT at the beginning of 2019. Prior to this, the trust was taxed as a partnership. It is now classified as a mortgage REIT.

Ellington Financial is a hybrid REIT, meaning that the trust is a combination of an equity REIT, which owns properties, and mortgage REITs, which invest in mortgage loans and mortgage-backed securities.

Ellington Financial has a market capitalization above $900 million. You can see a snapshot of Ellington’s investment portfolio in the image below:

Source: Investor Presentation

Credit securities comprise 47% of assets, with agency securities representing the majority at 53%.

On May 5th, 2021, Ellington Financial reported its Q1 results for the quarter ended March 31st, 2021. Due to the company’s business model, Ellington doesn’t report any revenues. Instead, it records only income. Interest income came in at $34.2 million, a marginal 0.5% increase quarteroverquarter, while core earnings per share came in at $0.43, 16.2% higher vs. Q4 2020 due to increased portfolio yield spreads.

The company leveraged its strong balance sheet to drive growth in its highyielding loan portfolios and opportunistically rotate its capital allocations towards more promising securities.

While its total long credit portfolio actually decreased by 9% quarter-over-quarter due to buying small commercial mortgages and consumer loans, Ellington’s book value per share increased from $17.59 to $18.16 during the quarter.

Growth Prospects

Ellington’s EPS generation has been quite inconsistent over the past decade, as rates have mostly been decreasing. As a result, its per-share dividend has also mostly been falling since 2015.

However, the company has done its best to diversify its portfolio and reduce its performance variance. For example, 74% of its RMBS exposure is allocated to 30year fixed mortgages.

Additionally, while around 51% of its credit portfolio is invested in residential mortgages, that 50% is split among many different securities types (NonQM,Reverse mortgages, REOs, etc.). Ellington has taken great care as of late not to concentrate its risk in too few areas, which improves economic return volatility.

Ellington has designed its portfolio in such a way that movements in rates over time won’t have a major impact on its overall portfolio.

However, with rate spreads consistently dropping and the stock’s expensive financing due to its high dividend should continue pressuring EPS generation. To be prudent and price in the issue, we are forecasting EPS growth of 1% per year through 2026.

Dividend Analysis

Ellington Financial has a volatile dividend history, with multiple reductions followed by increases. The company cut its monthly dividend from $0.15 to $0.08 in Q1 2020 due to the pandemic, but management has increased it several times since then.

In the 2021 first quarter, the company announced another increase back to $0.15 paid monthly, which is now on-par with the pre-pandemic dividend level. At a level of $0.15 per share each month, Ellington Financial’s annualized dividend payout is $1.80 per share. We forecast FY 2021 EPS at $1.76, reflecting the company’s asset rotation to betterperforming assets.

This means the annualized dividend payout is not quite covered by underlying EPS, a problematic sign. The company’s DPS should be seen as safe for the time being. However, based on DPS’ downward historical trajectory, slight decreases going forward are possible due to the risks of mortgages defaulting amid the ongoing pandemic and the overall decrease in interest rates.

One positive is that the balance sheet remains of high quality, even though Ellington’s debttoequity ratio increased from 2.6 to 3.2 during Q1. The days of mortgage REITs employing 8x or 9x leverage have come and gone, but Ellington is still embodying low leverage for a mortgage REIT, which should improve safety and reduce volatility during both good and bad times.

With a yield above 10%, the stock is certainly attractive for income investors, although a high level of volatility is to be expected. Since its IPO, the company has paid cumulative dividends in excess of $27/share, which works out to more than 1.5x its current share price. Therefore, it has delivered a solid income stream to its shareholders over the years.

Final Thoughts

High-yield dividend stocks always need to be considered carefully as the elevated yield is often a warning sign of fundamental deterioration. In the case of Ellington Financial, this seems to be the case, as the company has exhibited a great deal of volatility in its dividend payments.

The trust has a diversified loan portfolio and has proven successful at increasing its profitability over time. Ellington Financial’s dividend yield also looks safe for now, though another cut could be in the offering if the trust were to see a slowdown in its business.

Investors not looking to take elevated risks should probably avoid Ellington Financial stock. That said, Ellington Financial stock pays monthly dividends and has a high yield, assuming the dividend remains intact. Investors with a higher tolerance for risk may find Ellington Financial an attractive investment option.

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