BlackRock Income Trust (BKT: $6.13)
Coverage initiated October 4, 2019 at $6.13 in the HIGH YIELD portfolio.
Company Overview. BlackRock is the world's largest Asset Management company. This is the investment vehicle they have created with two goals: 1) capital preservation and 2) income generation. The portfolio is at least 65% invested in mortgage-backed securities (MBS). 80% of its assets are agency MBS, which means they are backed with the full faith and credit of the federal government, through insurers Fannie Mae, Freddie Mac and Ginnie Mae. The trust has been publicly-traded since 1988.
Market Analysis. With the broader market currently experiencing a host of headwinds – especially the trade war in China, inverted yield curve, and looming potential for a recession – Real Estate Mortgages are increasingly being viewed as a safe haven and defensive investment. Agency-backed MBS are some of the safest Real Estate investments one can make, so BlackRock is in a unique position to capitalize on investor rotation out of riskier sectors which are more exposed to the broader economy, and into Real Estate.
What’s more, the Fed is sparking the economy by lowering interest rates. That bodes well for the MBS market, as it means enhanced economic activity and more investment by both businesses and individuals into the Real Estate market. Additionally, the yield curve is slowly but surely returning back to normal, which means the likelihood of a deep recession is waning. An RBC Capital analyst just recently announced that the current housing market remains “favorable,” amid continued home price appreciation and a low mortgage delinquency rate. Although 2Q19’s mortgage delinquency rate did rise to 4.5%, that rate is still historically low. The percentage of loans in foreclosure for 2Q19 - 0.9% - is the lowest since 1995 (24 years ago).
What’s more, the 90-day delinquency rate is a mere 1.1%, the lowest since 2006. This means loans are not in serious delinquency, signaling that the underlying MBS market is on strong footing. With unemployment low and the economy continuing to remain robust despite the China trade war, the outlook for MBS over the coming year remains strong.
Competitive Analysis. By BlackRock standards, this is an extremely small fund – valued at under $400 million. In comparison, the world’s largest MBS REIT – Annaly Capital – is valued at $12.5 billion. So nothing BlackRock does can make a dent in the MBS market. That's all right. We're here for income, not impact.
And BlackRock isn’t trying to create the next Annaly. The company is very comfortable playing in the shallow waters of the MBS industry. As we’ll see in evaluating the stock performance (below), this company is not a boom-or-bust investment. It’s a stable, dependable long-term dividend play.
Financial Analysis. By the end of 2Q19, BlackRock produced a one-year return of 8.3% on its MBS investments. Its average annual three and five-year returns were closer to 3%. This is not the stock’s return, but rather the company’s internal return on its investments.
The company has about $600 million in managed assets, and only 32% of that is leveraged. While there is an extremely low cash-to-debt balance, that is normal for REITs. 80% of its portfolio is invested in U.S. assets, and the remaining 20% is held in cash or derivatives. 76% of the portfolio is currently invested in agency MBS – and the company is mandated to keep that number above 65% at all times. Again, agency MBS is a very stable sector of the broader Real Estate market.
The company produced $26 million in operating cash flow over the trailing 12-months, which is around 6% of its market cap. The company also boasts a high operating margin at 83%, so its dividend should remain stable for some time.
Stock Performance and Dividend. Over the past five years, the stock hasn’t budged from its trading range of $5.50-$6.50. That’s a very tight range to trade in for such a small-cap company. That said, the company’s agency MBS portfolio is pretty airtight in terms of risk. There just isn’t much here, which means investors aren’t on board for price appreciation, they are on board for the dividend.
Currently, BlackRock yields 6.8% annually. That’s an attractive yield for a stock that hasn’t ever traded 10% below its current price. To put that another way: In 31 years of public trading, the stock has never gone below $5.50, and earlier in the decade it was trading above $7. So investors can capture 6.8% per year for a stock that is highly unlikely to drop more than 10% from its current level – and that’s in a worst-case scenario.
An investment in BlackRock won’t make you rich, since the stock isn’t likely to double or triple (or even gain 50%). But it presents a stable opportunity to secure a high fixed income interest rate for many years to come. That said, the stock is up a healthy 10% YTD. However, 4Q18 saw the stock dip to just above its all-time lows as the entire market cratered. Going back a bit further, the stock has returned to its January 2018 trading level – which should be fine for investors, because the strategy with BlackRock is buy-and-hold, and keep collecting those dividend payments.
BMR Take: The name of the game here is defense. When the market faces downward pressure, it’s time to look at stocks that aren’t going to move the needle in either direction, and instead facilitate a healthy annual yield. BlackRock is exactly that. Perhaps the most important quality of this stock – and one that bears repeating – is that it is currently trading just 10% above its all-time low. This is a company that has been through both the Tech bubble burst of 2000 and The Great Recession of 2008, and yet still has never traded below $5.50. So even if the Chicken Littles of the world are correct, and a recession is indeed imminent, the downside risk here is extremely low. Meanwhile, investors will be rewarded with nearly 7% per year on their invested capital. So even if the stock dips to all-time lows - $5.50 – it should only take two years to recoup that money and start earning profit. And that’s assuming the stock stays at its all-time low and doesn’t recover.
We’re just giving you the worst-case scenario here to illustrate how it’s not really that bad. The more likely scenario is that the stock continues its upswing and finds a trading range at the mid-$6 level, and sits there for some time. During that time, investors earn their fixed income and stay safely away from the other more volatile sectors.
Portfolio diversification is always key, but in times of uncertainty it is even more key. An investment in BlackRock achieves some much needed diversification.