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international income investors could reap the rewards in the form of
higher dividends. |
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Cooling Housing Market Leaves This REIT Yielding Over
20% |
Published: December 11, 2006
When house prices were rising sharply, New Century (NYSE: NEW), a subprime lender, attracted homebuyers with weak credit histories to take out loans. A booming housing market made these loans less risky, since the borrower could refinance an existing mortgage by using a rapidly appreciating house as collateral, if necessary.
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The problem -- what goes up must come down. Since the housing boom has faded, investors now worry that default rates will increase, the firm's loan base will dry up, and profits will suffer. New Century's share price, which is now trading near its 52-week lows, reflects these concerns.
No doubt the mortgage-lending market won't be as easy in 2007 as it was this past year, but many of the challenges ahead may be baked into New Century's share price.
Certainly, earnings are trending down. In the latest quarter, the lender posted a sharp drop in profits, to $1.12 a share, down from $2.04 a share last year. For the year, per share earnings estimates have steadily declined from $7.10 in September to $6.09 by the end of November. Next year's estimates tell the same story, with projected per share earnings falling from $6.73 to $4.18 in the past three months alone.
Lower earnings could affect dividend payouts. In its latest quarterly report, New Century's management committed to distributing at least $400 million to shareholders next year. That translates to about $7 per share -- roughly the same as this past year's trailing 12-month payout of $7.10 per share. The big difference is management said the money would come either through dividends or else through share repurchases. In other words, a dividend cut could be in the works.
And yet, as a dominant player in the lucrative subprime mortgage market, New Century may continue to generate solid interest income and capital gains from its loan portfolio. Moreover, while the housing market is cooling, it's not crashing, and demand for subprime mortgages is widely expected to stabilize over the next few years.
As a real estate investment trust (REIT), New Century is required by law to distribute 90% of its taxable earnings to shareholders. Based on the 2006 and 2007 earnings estimates just given, we can expect the dividend to average about $5.00 a share over the next couple of years. That may not be as juicy as investors have come to expect, but it still provides a superior, double-digit yield at the current share price.
Trading at just 9 times next year's earnings, and roughly on par with its book value, New Century's shares are attractively priced for a stock that carries a yield of about 20%. Even with its reduced earnings picture and uncertain dividend outlook, the stock should provide steady income over the long term.
Action To Take ---> Like most mortgage REITs, New Century operates in a cyclical industry that's highly sensitive to changing economic conditions largely beyond its control. In other words, this stock is not for the faint of heart. That said, NEW could provide a solid income stream for risk-tolerant investors with a long-term orientation.
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Editor's
Note: Carla Pasternak's model portfolios focus exclusively
on investment opportunities with ultra-high yields. In fact, in each
of her monthly High-Yield Investing newsletters she
provides readers with an entire portfolio of stocks, funds and
preferreds that are delivering annual dividend yields of +10% or
more. That's right -- in order to even be considered for
inclusion in this portfolio, an investment
must deliver cash payments of at least 10% per year. Visit
this link to learn more about Carla Pasternak's High-Yield
Investing newsletter.
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Good investing!
Carla Pasternak
Editor
High-Yield Investing
http://www.StreetAuthority.com
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Carla
Pasternak draws on a variety of financial backgrounds to make profitable
calls on income-generating stocks for her readers.
Carla has
been employed in the investment industry for more than two decades. In
addition to her work as a writer for several other nationally recognized
financial publishers, her previous experience includes a position as
President of a well-respected investor relations firm. She has also been
writing shareholder reports for public companies (annual reports,
speeches, corporate profiles, slide shows, etc.) since 1980.
A highly
successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select
companies that not only pay rich dividends, but that also have the
potential to deliver strong long-term capital gains.
On the
educational front, Carla holds both MBA and Ph.D. degrees. When she's
not watching the market, she's teaching business courses at the college
level and managing several million dollars in portfolio assets.
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