2023-07-28 11:03:43 ET
Summary
- Chimera has consistently experienced substantial capital destruction, losing over 90% of its value since 2009 despite various market conditions.
- The allure of the company's high dividend yield, currently around 10%, has attracted income-seeking investors, but the unsustainable dividend policy leads to repeated cuts, resulting in further stock price declines.
- The heavy use of leverage and inadequate hedging practices make Chimera vulnerable to market fluctuations, making it a risky investment choice for long-term investors.
Chimera Investment Corp. (CIM) has a long history of seemingly high dividends and extremely real capital destruction. Since 2009, Chimera has lost over 90% of its value.
The Max Chart
Chimera Max Chart (Seeking Alpha)
Despite a raging bull market, Chimera managed to consistently lose value in all types of economic environments. The 10% yield seems to attract "yield thirsty" investors like moths to a flame. There is something about high yield stocks that brings out the worst in income seeking individuals.
Moth to the Flame (Deviant Art)
In Chimera's case, this high yield will last because the shares will continue to drop and many new investors will be burned again and again. This is how it works. Chimera offers a ridiculously high dividend that is not covered by earnings. People buy Chimera shares. Not so surprisingly Chimera cuts the dividend. This causes the price to drop which makes the yield seem higher. The vicious cycle of destruction continues until the music stops.
Even though the yield remains greater than 10%, shareholders will have lost significant value and the dividend will have shrunk in size. In my opinion, Chimera's management will continue to rinse and repeat. Content knowing that there are always new investors willing to sacrifice everything for high yield. The show must go on no matter how ugly it gets.
Let's look at the current situation at Chimera. The current payout ratio is a cool 124%. Meaning that issuing the current dividend destroys 24% of the current value, but wait it gets worse.
Dividend Summary (Seeking Alpha)
Since Chimera repeatedly destroys capital, there is no escape for shareholders except to sell. The negative five-year growth rate of the dividend tells the story. Each year shareholders get paid less, but the dividend yield remains around 10% or greater. This only happens because the price of the stock drops every time they cut the dividend, and they cut the dividend all the time. People might want to blame the rising rate environment for Chimera's struggles, but this struggle was happening before rates were rising. It has happened throughout Chimera's existence. It will likely happen again for reasons I outline below.
Dividend History Since 2008
Dividend History (Seeking Alpha)
In 2008, Chimera paid $3.10 in dividends and the stock price fell from $82 to $13. Fast forward to 2022 and Chimera paid $1.40 in dividends and the stock price fell from $10.21 to $5.50. No matter what you get paid in dividends, you lose more in capital depreciation. When the price gets too low, Chimera executes a reverse split. It's rinse and repeat.
On June 14th, 2023, Chimera cut the dividend again which you can read about here. Another cut in a long history of cuts.
The only way to make money owning CIM is to make incredibly well-timed trades for short periods of time. I don't really think it is possible. I don't blame the management for Chimera's difficulties, but I do think we should take a look at their compensation.
The Management
In 2022, executive compensation was over $25 million and shares lost over a billion dollars in shareholder value and over 59% per share. Management compensation has remained high regardless of performance. For more information about Chimera compensation check here.
2022 Chimera Executive Compensation (Salary.com)
In April 2020, if you perfectly timed the bottom, the stock would have almost doubled by the end of 2022. This brief moment of stock appreciation did not last and today the stock is currently trading near an all-time low. I'm not sure I can even blame the management. The business is extremely difficult to manage profitably. It's a business that requires perfect allocation of leverage. It's a business predicated on paying out more in dividends than they earn. When the dividend gets unsustainable, they cut the dividend again.
I'm not sure anyone could or should make this business model work over the long term, but I don't blame anyone for getting seven-figure compensation to try and keep it running.
I blame the people that buy shares. They keep this business running. I blame the people that recommend shares to income-starved investors. I believe that this is deleterious to their clients' and followers' portfolios. I don't blame Chimera. In my opinion, Chimera does what it does. It destroys value in three ways.
Chimera The Three-Headed Beast
Chimera of Arezzo (World History Encyclopedia)
Chimera, much like its mythical namesake, is a beast of many parts. It can hurt your portfolio in many ways. The main difficulty for most Mortgage REITs is that they use an unhealthy amount of leverage. It is difficult to be right and using this amount of leverage makes any bad decisions much worse. These companies then use that leverage to promise unsustainable dividend payouts. Combine this with inadequate hedging and you get the beast known as Chimera.
Conclusion
I believe that Chimera will continue to cut its dividend in the future and its stock price will fall again. We cannot in good conscience recommend buying shares in Chimera at any time even for short-term trades. We also recognize that over short time periods, it is possible for Chimera to double which makes shorting Chimera difficult.
We don't know when the combination of leverage and inadequate hedging will cause Chimera to blow up again, but we are confident that someday it will happen. History tends to rhyme and Chimera has been consistent. When a company shows you what it is, believe what they show you. Since no material changes have occurred at Chimera, we can likely expect the same results.
For these reasons, we prefer to leave this particular beast alone, and we suggest that our followers do as well. As always, good luck investing, and don't chase high yields.
For further details see:
Chimera: Avoid This Habitual Dividend Cutter