Saturday, May 10, 2014

Recent Buy: PMT

May 9, 2014: Bought 120 shares of PMT at $20.94 per share.

Founded in 2009 and based in Moorpark, California, PennyMac Mortgage Investment Trust (PMT) is a specialty finance company that invests primarily in residential mortgage loans and mortgage-related assets. Operating as a real estate investment trust (REIT), the company is not subject to federal corporate income taxes if it distributes at least 90% of its taxable income to shareholders.

PMT is a Dividend Challenger with a 5-year streak of dividend increases. It pays quarterly dividends in January, April, July and October. The current dividend is 59¢ per share, so starting yield on cost is an impressive 11.27%.

Since it was founded in 2009, PMT share price performance has been rather mediocre, increasing only 11% compared with 92% by the S&P 500. The recent price drop following its latest earnings announcement provides a great investment opportunity, in my view.

Analysis of PMT

My fair value estimate for PMT is $39.40, so I picked up shares at a discount of about 69%. The following table provides some key statistics for PMT, with highlighted values relating directly to my selection criteria.

The Chowder Dividend Rule requires that the sum of a stock's dividend yield and its 5-year dividend growth rate exceeds 12%. With its short history of dividend increases, PMT does not yet have a 5-year dividend growth rate. In cases like this, I use 50% of the 3-year dividend growth rate instead:
dividend yield + (3-yr dividend growth rate)/2 = 11.27 + 43.6/2 = 33.07
So, PMT easily meets the Chowder Dividend Rule. Additionally, PMT's debt to equity ratio is below 50% (17%). As an REIT, PMT's EPS payout ratio (86.45%) is expected to be on the high side:

PMT appears at the top of my dashboard of dividend candidates and tops the sector winners for May. It earns 6 stars: (*******)

Other ratings for PMT

 Zacks Rating  Hold 3
 Thomson Reuters StockReport+   (7/10) Neutral 
 The Motley Fool's CAPS Rating  (*****)

Concluding Remarks

PMT is the second REIT holding in DivGro and increases my exposure in the Financials sector to 7 stocks. Based on my analysis of dividend growth stocks by sector, with this buy, I've reached my target of 7 holdings in the Financials sector.

PMT is the largest non-bank lender in the U.S. With its recent price drop, PMT now offers a dividend yield above 11%. That is a remarkable yield!

The question is, of course, if the dividend is sustainable. My bet is that it is, although I realize that owning PMT carries more risk. I'm willing to take the risk for a dividend yield exceeding 11%.

120 shares of PMT adds $283.20 of expected dividend income, increasing DivGro's projected annual dividend income to $4,283.23.

PMT is the 30th holding in DivGro.


  1. I used to own PMT, but I got tired of the CEO treating it like an ATM. I didn't feel like he was ever acting in the best interest of investors, just in the best interest of himself. I liked their business, but I couldn't get past his self-dealing ways. Any thoughts on that?

    1. Thanks for your comment, Bruce!

      I did not delve so deeply into PMT to notice the CEO's dealings. Your comment prompted me to do some research, which revealed an investigation of claims of self-dealing by the CEO. He established a "parallel" company, PennyMac Financial Services Inc, which benefits from the business relationship. As CEO of both PMT and PennyMac Financial Services, a conflict of interest may occur.

      I'd be curious to see where this investigation leads. The fact that Robbins Arroyo (a nationally recognized leader in securities litigation) is involved, gives me hope that proper scrutiny of the business activities will be done.

      For now, I'll stick with my ownership of PMT shares, even though this leaves a little foul taste in the mouth. Of course, if the dividend is frozen or cut, I'll consider selling my shares.

      Take care and thanks again for alerting me about this!

    2. Yeah, all of the shady stuff going on with PennyMac Financial Services made me think that the CEO was just using PMT as a piggybank or an ATM. It was a big drop in dividend income for me to sell it, but I just wasn't comfortable with what appeared to be self-dealing. I'm glad you didn't take my post as being critical of your selection, just wanted to make sure you knew about all of it. Good luck, and keep on doing your thing!

    3. Thanks, Bruce -- I welcome your feedback and I appreciate you pointing this issue out. And, even if you were critical of my selection, I would welcome that as well. In my view, that's a valuable way to learn. This is prompting me to dig a little deeper into the candidates that I select to buy.

      BTW, having a parallel organization that provides services is not, in itself, a bad thing. We're currently in the process of buying a new house and our mortgage broker uses a parallel company to do the appraisal. They set very high standards and expect the appraisal to be so, as well.



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