Dear Mr. Berko:
I’m interested in owning 400 shares of Hatteras Financial for its 18.2 percent dividend yield because I need the income, and 125 shares of Millicom International Cellular because I also need long-term growth. Your thoughts on each issue would be greatly appreciated.
E.R., Minneapolis
Dear E.R.:
Hatteras Financial Corporation (HTS – $29.41), yielding 18.2 percent, is a splendid short-term speculation, but a long-term ticking time bomb. HTS has no employees and is metaphorically a huge mortgage barge stuffed with adjustable-rate and hybrid-adjustable rate, single-family residential mortgage pass-through securities guaranteed by the U.S. government or a government sponsored entity. HTS came public in April 2008 at $25 per share with an initial 75-cent quarterly dividend, which has been raised twice to $1.10 per quarter.
The HTS barge is piloted by Atlantic Capital Advisors (I’ve never heard of them), which plays the “spread game” to generate a profit. Atlantic maximizes the difference between the long-term yields on GSE investments and its short-term cost to borrow money to own the GSE mortgages. While there are no credit risks in owning the GSE mortgages, there are enormous interest rate risks. And that risk involves some potentially rough waters when (not if) short-term interest rates rise, forcing HTS’s profits to flounder.
Allied Capital (the captain) funds HTS’s assets via the purchase of repurchase agreements, which are short-term liabilities (between several days and several months), the interest rates of which change much quicker than the yields on its GSE assets.
During periods of rising interest rates, the higher borrowing costs will significantly reduce earnings, and HTS’s attractive dividend will no longer be attractive. The consequences can be greatly amplified by Allied Capital’s use of substantial leverage. And if Allied doesn’t captain HTS just right, declining GSE values could force HTS to shed assets and founder.
Meanwhile, I can’t find a track record to indicate that Allied has the “fingerspitzengefuhl” to navigate HTS through certain to come rough waters. Forgetaboutit!
Millicom International Cellular (MICC – $90.60) is a global cellular communications company with operations in 14 countries in South America, Central America, Asia and Africa. MICC also provides prepaid services, broadband Internet, television services and public telephony. For the year ending 2009, MICC had 34 million subscribers, from which it derived $3.4 billion in revenues and $505 million in net income or $4.80 per share.
MICC is a low-cost provider generating 70 percent of its revenues from Central and South America, where cellular penetration is less than 30 percent. And management believes it can achieve significant revenues from Africa, which has been ignored by the cellular industry.
MICC, home ported in Luxembourg, has an excellent management team, a strong balance sheet and attractive net profit margins. There are 21 analysts who follow MICC. The consensus is that MICC could be a $150 stock in the next three years and that earnings will be in the neighborhood of $6.55 to $7 per share. So considering a modest P/E of 20, the $140 stock price estimate is reasonable. Buy the stock.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate Web site at www.creators.com.
© 2010 Creators Syndicate Inc.
