HomeMost PopularRithm Capital: The Dividend Lesson

Rithm Capital: The Dividend Lesson

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Risk reward ratio / risk management concept: Risk and reward bags on a basic balance scale in equal position, depicts investors use a risk reward ratio to compare the expected return of an investment

Exploring Rithm Capital Corp: Pros and Cons

Rithm Capital Corp. (NYSE:RITM) may appeal to investors seeking income, with a current forward yield of 10.4%. The companyโ€™s unique business model sets it apart from other mortgage REITs, allowing for potential sustainable payouts.

Rithm Capital differentiates itself through vertical integration, a focus on non-agency mortgages, and single-family rentals. Vertical integration grants the company advantages in cost control, margins, and customer relationships. Non-agency mortgages, while riskier, often offer higher yields. Additionally, exposure to single-family rentals diversifies the companyโ€™s income and reduces overall risk.

Historical data supports Rithm Capitalโ€™s business model. While the company temporarily reduced dividends during the COVID-19 pandemic, it quickly recovered and stabilized. Meanwhile, other leading mREITs experienced chronic dividend declines and book value losses.

Considering Rithm Capitalโ€™s Yield in Context

When evaluating Rithm Capitalโ€™s yield, it is essential to consider historical benchmarks and risk-free rates. Over the past four years, Rithm Capital yielded an average of 11.2%, making its current forward yield of 10.4% slightly below average.

Furthermore, comparing Rithm Capitalโ€™s yield to risk-free rates shows a thinner gap than in previous years. The yield on 10-year Treasury bonds averaged 2.27% over the past five years and currently sits at 4.44%. This implies a narrower spread between Rithm Capitalโ€™s yield and risk-free rates, indicating a potential valuation premium.

Examining Rithm Capitalโ€™s Leverage Risks

Rithm Capitalโ€™s leverage is currently at a high level, with a debt-to-equity ratio of 4.07x, above its historical average. This high leverage exposes the company to potential headwinds caused by rising interest rates.

The company may face challenges with higher interest rates, which could reduce its net interest margin and profitability. Additionally, high inflation and interest rates might increase delinquencies and defaults, with Rithm Capital particularly susceptible due to its exposure to non-agency mortgages.

Additional Risks and Final Thoughts

While there are positives to Rithm Capital, such as its differentiated business model, itโ€™s crucial to acknowledge the risks. The marketโ€™s valuation of the company appears to have factored in some of these risks, with Rithm Capital trading below its book value. However, when considering the dividend yield, a premium is evident. Therefore, a recommendation of a HOLD rating is advised.

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