Chimera's CIM-A Preferred Share Trades at Premium Despite Lower Yield

Valuation Comparison

Chimera Investment Corporation (CIM) offers multiple preferred shares and baby bonds. Among them, the fixed-rate CIM-A (CIM.PR.A) currently provides a stripped yield of approximately 9.27%. However, at a recent price of $22.00, CIM-A trades at 110.7% of its buy target, placing it in overpriced territory. In contrast, CIM-B (CIM.PR.B), a floating-rate share, trades at $24.40, which is only 100.3% of its buy target, and offers a higher stripped yield of about 10.24%.

Fixed vs. Floating Rate

The primary appeal of CIM-A is its fixed 8% coupon, which protects income if short-term rates decline. CIM-B's dividend would fall with rates. However, the premium for this protection is substantial. Other fixed-rate securities are available without such a high premium relative to buy targets. The yield difference between CIM-A and CIM-B is significant, and CIM-B currently offers more income for similar risk.

Yield to Call and Risk

CIM-A has an annualized yield to call of 480.6%, derived from its price of $22.00 versus the $25.00 call value. If called immediately, investors would gain about $3.42 per share. However, such a call is unlikely because Chimera would prefer to repurchase shares on the open market rather than pay the higher call price. The annualized figure is inflated by compounding a one-month gain.

Both CIM-A and CIM-B carry a risk rating of 4 out of 5. The common equity to preferred liquidation ratio is only about 1.2x, providing a thin cushion for preferred shareholders. This weak coverage demands higher yields to compensate for the risk.

What it means for income investors

Chimera's preferred shares offer high yields but carry elevated risk due to limited equity coverage. The valuation disparity between CIM-A and CIM-B highlights the importance of comparing yields and prices across similar securities. Income-focused investors may find CIM-B more attractive given its higher yield and closer proximity to its buy target.

Reporting based on: Seeking Alpha. Figures verified against market data where available.