Income investors love Rithm Capital(NYSE: RITM). Shares of the investment management company currently pay a 9.8% dividend yield, and there's plenty of reason to believe this level of payout will be sustained for years to come.
Value investors are also starting to notice the stock, which currently trades at a depressed valuation and has a clear mechanism to unlock hidden value in the year to come.
No matter what type of investor you are, here are three reasons Rithm stock could shine and bring you great results in 2024.
1. Rithm Capital is betting $300 million on a turnaround
At its core, buying Rithm stock is a bet on the health of the U.S. mortgage market. Its business is commonly referred to as a mortgage real estate investment trust (mREIT). That means it makes money from the mortgage market, whether that be through originating the loan, servicing it, or simply owning the right to its cash flow streams. As long as Americans are taking out mortgages and paying them off on time, Rithm's underlying business will keep humming.
Over time, Rithm has proven it can generate long-term shareholder wealth by focusing on the U.S. mortgage market. Returns on equity have averaged 12.2% since 2013. These attractive returns helped shares trade above book value for years, but after some stumbles in early 2020, mostly caused by the pandemic, the market re-rated the stock lower. Today, shares trade at a 13% discount to book value, even though the return on equity has popped back up toward historical norms.
To take advantage, Rithm's management recently introduced a $300 million share repurchase plan, $200 million of which is dedicated to buying back common stock. The rationale is simple: Management believes its assets to be worth at least book value, and by repurchasing stock, it's making an immediate double-digit return on its investment.
RITM Price to Book Value data by YCharts
2. Rithm offers a huge dividend yield with room to grow
Take a quick glance at Rithm Capital's 9.8% dividend yield, and you might believe it to be unsustainable, destined to be cut in the near future. The reality, however, is that the dividend has remained high for years. The company has even managed to raise the payout on several occasions. The only time the dividend was seriously cut was at the start of the pandemic, in early 2020, when it was slashed to only a few cents per share. The payout has risen steadily since, yet remains below its pre-pandemic highs.
Could the dividend be cut again if the economy slips into a recession? Certainly, though this would be true for many dividend stocks. The reality is that the payout is likely safe as long as major economic headwinds don't appear. Rithm Capital has around $1.9 billion in cash and liquidity, and as the recent share repurchase program proves, it has plenty of cash flow to direct to growth investments, dividends, and other value-creating efforts .
RITM Dividend Yield data by YCharts
3. With Rithm Capital, investors can double down for free
If Rithm Capital stock continues to trade at a discount to book value, patient shareholders can simply wait and collect an annual dividend of nearly 10%. If the valuation improves back toward historical levels, however, shareholders will profit in multiple ways apart from collecting dividend payments. Shares would rise in value by 15% simply by returning to book value.
Total shareholder profits would be even higher, though, considering that the company is investing hundreds of millions of dollars at the discounted valuation. If things go according to plan, this stock could be a triple-winner for patient investors.
What risks should you be aware of? By far the most pressing challenge Rithm Capital could face in 2024 is a weakening of the U.S. economy, which may disrupt the stability of the mortgage market. If fewer mortgages are originated, or if current mortgage holders find it difficult to meet their loan obligations, Rithm Capital shares will head lower, though the current discount to book value may buffer some of the downside risk.
The company also recently purchased Sculptor Capital, which manages $33 billion in assets, much of it focused on U.S. credit markets . If asset prices fall, Sculptor will see a decrease in the value of the assets it manages, directly reducing the fees it collects.
Rithm stock is not without risk, but if you're confident that the economy won't nosedive in 2024, shares have multiple ways to win big.
Should you invest $1,000 in Rithm Capital right now?
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Ryan Vanzo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
