New Residential Investment Corp. (NYSE:NRZ) is my top high-yield income pick for 2017. Upside related to New Residential Investment's mortgage servicing right portfolio is the main reason why I think shares can trade up significantly in 2017. Further, investors in this income vehicle are getting paid a handsome yield while New Residential Investment's management may also decide to hike its dividend rate this year.
I have singled out New Residential Investment several times in the last two years as a highly promising income vehicle with strong core earnings growth and a covered dividend. As a matter of fact, few high-yield companies have as strong a dividend coverage as New Residential Investment, leaving headroom for dividend growth. What's more, continued increases in short-term interest rates may translate into higher share prices in 2017.
New Residential Investment - New Highs Are Possible, And The Shares Are Still Not Expensive
New Residential Investment's shares have been on a tear in 2016. Investors buying at the beginning of last year have seen their capital appreciate a whopping 30 percent, not including the very handsome 14-16 percent dividend that investors could lock in last year.
Though shares have had a good run, New Residential is by no means expensive. Based on the mortgage investment company's 3rd quarter results, New Residential Investment's shares are selling for only ~7.7x run-rate Q3-16 core earnings.
Waiting For A Dividend Hike
Today, income investors pay ~$16 for a piece of New Residential Investment's business. In return, they will get an unusually safe ~12 percent yield based on a forward dividend rate of $1.84/share.
However, since New Residential Investment has significant excess dividend coverage - and has had so for a while - chances are that the company will announce a dividend hike in the near future. Management has paid more cash to shareholders in the past on the back of higher core earnings, and a higher dividend is entirely within the realms of possibility in 2017.
Frankly, everything else but a dividend hike would be a disappointment to me.
That being said, though, investors can look optimistically into the future because of New Residential Investment's mortgage servicing rights portfolio. Mortgage servicing rights increase in value in lockstep with higher interest rates, which makes them uniquely attractive mortgage assets to hold in a rising rate environment.
$20 Is A Realistic Price Target
A company that pulls in way more cash than it pays out in dividends, and that has a compelling investment portfolio poised to profit from higher rates, can sell for at least 10x core earnings IMO. Applying a 10x core earnings multiple to New Residential easily puts the company's equity valuation in the $20/share range.
I think the chances have never been better that shareholders will see continued capital appreciation on the back of higher short-term interest rates. New Residential Investment's robust dividend coverage and MSR upside could deal investors another dividend raise in 2017. Further, New Residential Investment's shares could extend their run as interest rate hikes will most likely be viewed as a positive catalyst for its shares. Buy for income and capital appreciation.