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New Name… and Higher Risk of a Dividend Cut for This 9% Yielder

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Nearly a year ago, I analyzed the dividend safety of mortgage real estate investment trust (REIT) New Residential Investment Corp. In September 2021, I said the company’s dividend had a moderate risk of being cut due to the company’s history of lowering the dividend and its declining net interest income (NII).

As of Monday, the company changed its name to Rithm Capital (NYSE: RITM). It will now manage the business internally, rather than have outside managers take care of the portfolio.

The dividend safety rating has been downgraded, but that has more to do with past performance than what is expected.

This year, NII – the measure of cash flow we use for mortgage REITs – is expected to soar. For the full year, Wall Street forecasts NII to come in at $1.6 billion.

That is the highest number in years. Mortgage REITs typically make more money when interest rates are higher, so it’s no surprise that NII is projected to increase as rates come off historic lows.

Chart: Rithm Capital's Net Interest Income Is Bouncing Back
Rithm currently pays a $0.25 per share quarterly dividend, which comes out to a 9.3% yield.

The company should have no problem covering the current dividend if its NII is near the $1.6 billion forecast. It could even raise the payout substantially, as it is expected to pay shareholders $476 million in 2022.

The problem is the company’s new name won’t shake off the stink of the last few years.

The company slashed its dividend by 90% in 2020 from $0.50 per share to $0.05. Even after several dividend increases, the current dividend is half of what it was two years ago.

That tells us that when the going gets tough, management cuts the dividend.

Last year’s payout ratio was also too high at more than 100% of NII. With NII expected to spike this year, that’s less of a problem, but it does show that management overextends itself from time to time.

This year looks to be a good year, but it wouldn’t surprise me if the company gets ahead of itself again and boosted the dividend to unsustainable levels as it has in the past.

I don’t expect a dividend cut in the immediate future. But the company has proven that it does not do a good job of managing the dividend.

Investors should receive their expected dividend in the immediate future, but past that, there’s a good chance Rithm Capital will have to cut again.

Dividend Safety Rating: D

Dividend Grade Guide
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Good investing,

Marc

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