In order to check out the valuation of Hatteras Financial (NYSE: HTS ) , we don't want to look at only its price-to-book ratio of 1.17. That may seem cheap, but really we don't know without looking at the ratio in historical context. In fact, it's about in-line with the company's average over its brief history since inception in 2007.
Hatteras Financial's dividend is 14.4%. As a residential real estate investment trust, the company distributes the large majority (more than 90%) of its earnings as a distribution to shareholders (hence the enormous dividend yield). Mortgage REITs such as Hatteras have done quite well in this low interest rate environment, but should short-term rates begin to rise, Hatteras might see a dip in earnings since it typically relies on short-term borrowing to make longer-term investments.
Next, we want to ensure that Hatteras Financial's stock has the ability to rise over the next five, 10, or 20 years. A company that's growing its net income has the best possible chance to see its share price rise over time. Of course, we can't predict the future, but we can look back to get an idea of how the company has performed in the past in order to try to ensure future earnings growth. Over the past three years, Hatteras Financial has grown its earnings per share by 68.4%.
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