12% Dividend Yield Sure Beats 8%

Core Viewpoint - The article discusses the investment potential of PennyMac Mortgage Trust's preferred shares, PMT-A and PMT-B, highlighting their current yields and the implications of a legal situation that may affect their classification and dividend rates [1][6]. Investment Strategy - The company has been actively purchasing PMT-B shares, acquiring a total of 5,155 shares for approximately $118,379, representing about 7.76% of the total portfolio [2]. - The purchases were executed in multiple transactions to avoid signaling a large buy order to the market, and all shares were placed in a tax-advantaged account [2]. Legal Context - On August 25, 2023, PennyMac asserted that the LIBOR Act would change the nature of their preferred shares from fixed-to-floating to fixed-to-fixed, which was later contested by the company [3]. - Following the announcement, share prices for PMT-A and PMT-B fell, prompting the company to begin building a position at $22.26, anticipating that the shares should float [3][4]. Valuation Insights - The stripped yield for PMT-A and PMT-B is currently around 8.6% and 8.43%, respectively, but could rise to approximately 12.11% and 12.23% if management is compelled to honor the floating rate [1][6]. - The company believes that if PMT is forced to honor the contract, the floating yield could be around 12.7%, which would likely lead to the shares being called [6]. Market Dynamics - PMT-B has been trading at a discount, between 94.7% and 95.6% of the target buy-under price, indicating a favorable risk/return profile for investors who believe the shares will eventually float [6]. - The disparity in market pricing suggests that many investors currently do not believe the rate will float, presenting a potential opportunity for those with a different outlook [9]. Future Outlook - The company anticipates that as awareness of the lawsuit grows, share prices may trend upwards as investors reassess the likelihood of the shares remaining at a fixed-rate dividend [9]. - The potential for further price dips could provide additional buying opportunities, although a significant investment has already been made [9].