Rithm Capital Corp. (RITM) recently announced its board’s approval of third-quarter 2024 dividends for both common and preferred stockholders. The common stock dividend remains steady at 25 cents per share, consistent with the previous quarter. It will be paid on November 1, 2024, to stockholders of record as of October 1. Notably, the company continues to maintain a dividend yield that surpasses the industry average.
Based on the closing price of $11.78 per share on September 23, the stock boasts a dividend yield of 8.5%, significantly higher than the industry average of 1.8%. This raises the question: is this dividend yield sustainable, and what can investors expect in the future?
In the second quarter, Rithm Capital distributed $122.4 million in common dividends. For the third quarter, the board also declared dividends per share for its preferred stock series: 69.9 cents for Series A, 68.9 cents for Series B, 39.8 cents for Series C, and 43.8 cents for Series D. These dividends will be paid on November 15, 2024, to preferred stockholders.
While the high dividend yield is attractive, a closer look at Rithm Capital’s financial position reveals some potential areas of concern. Total assets at the end of the second quarter reached $42.02 billion, up from $39.72 billion at the end of 2023. Total equity also increased to $7.4 billion at the end of June from $7.1 billion at the end of 2023. The company exited the second quarter with $1.24 billion in cash and cash equivalents. However, its long-term debt to capital ratio stands at 60.1%, higher than the industry average of 43.7%. This high debt level could pose challenges in maintaining the current dividend payout.
Furthermore, net cash used in operations amounted to $1.2 billion in the first half of 2024, a stark contrast to the net cash from operations of $1.2 billion a year ago. Over the past five years, Rithm Capital has generated positive net operating cash flow four times and negative cash from operations once. These fluctuations in cash flow raise questions about the long-term sustainability of its dividend payments.
Despite these concerns, Rithm Capital reported adjusted earnings of 47 cents per share for the second quarter of 2024, exceeding the Zacks Consensus Estimate by 11.9%. This strong performance was driven by an improving Mortgage Loans Receivable business and solid Asset Management unit. The company’s expanding presence in the Newrez business and strategic initiatives are likely to increase the market share of its origination platform in the future, offering significant growth potential for investors.
However, rising expenses could hinder this growth trajectory. Despite the challenges, Rithm Capital’s diversified business model provides a buffer against volatility in the mortgage market. Its residential mortgage origination business is expected to improve in the coming months, and positive impacts from the asset management business acquisition are projected to bolster cash flows and support dividend payouts. The company’s efforts to enhance margins from the Sculptor (asset management) business could help sustain its robust yield.
In terms of price performance, RITM shares have gained 22.4% in the past year, compared to the industry average of 28.6%. While this performance is positive, it lags behind the broader industry. Investors looking for more aggressive growth in the Finance sector may consider other options.
Rithm Capital currently holds a Zacks Rank #3 (Hold), indicating a neutral outlook for the stock. Investors seeking higher-ranked players in the broader Finance space may consider Jackson Financial Inc. (JXN), WisdomTree, Inc. (WT), and HIVE Digital Technologies Ltd. (HIVE), each carrying a Zacks Rank #2 (Buy) at present. These companies are expected to experience significant growth in earnings and revenues, making them potentially more attractive investment opportunities.
