The company and its dividend still appear to be in good shape, and CapitalSource is well positioned to take advantage of current fears in the capital markets, in our opinion. When credit spreads widen, companies like CapitalSource can charge higher interest rates on loans, potentially improving net interest margin in future years.
Morningstar isn't the only one. There's some very informative discussion on the Motley Fool boards:
A few excerpts from ongoing discussions that were started by TMF James Early:
�I talked with Tom Fink (CapitalSource's CFO) today about the quality of their mortgage securities. After the chat, I feel even better about the quality of their RMBS (residential mortgage-backed security) portfolio��
�� CSE, wanting to qualify as a REIT, has basically collected the highest-quality real estate securities it could find. Through hedging/match-funding, CSE aims to make these bulletproof��
�The information indicates that these securities are about as bulletproof as possible. I feel CapitalSource's decline in this choppy market is unwarranted.�
�As I've said before, CapitalSource's intent is to not be in the RMBS business. It wants to be a lender, making the complicated (i.e., profitable loans) it does well. On the loan front, Tom reiterated that the company is built for this sort of environment. They're seeing fantastic spreads��
�The bottom line on all this -- the bottom line on any investment, really -- is that everyone will have to make his or her own call. Nobody can predict the future, but from looking at the hard facts -- which is what fundamental investors do��
�I can say that CapitalSource's yo-yo stock movement indicates a market that misunderstands the stock, and its value far exceeds its current price.�
�The market misunderstands CapitalSource. We hear it mentioned by the media in the same breath as companies actually in the mortgage business, with significant exposure there. But it has sound management with high insider ownership, a differentiating business model (complicated loans w/focus on health care), outstanding returns, and an outstanding dividend. It's not a stock for the volatility-phobic crowd, but investors with an eye to the long-term should be nicely rewarded by this company.�
About a week ago Cramer warned viewers to stay away from CSE because the dividend was "too high" and would likely go down (LOL, of course it will go down... As the price goes up!!!). He also mentioned that he didn't trust stocks with dividends above 10%. What he didn't mention was that prior to the recent drop, CSE's 200 day moving average price was above $25 and the dividend ($2.40 for 2007) was below 10%... Cramer threw out the baby with the bath water.
FYI, based on today's close the dividend now sits at 13.6%
If Morningstar and the Motley Fool are both right than CSE should be an easy double in about five years based on dividend alone (assuming an entry price of $17.60 or less).