Subprimal Fears Signal a Time to Buy

Jim Ackor is scratching his head.

Ackor is an analyst for RBC Capital Markets, and the cause of his bemusement is the share price and dividend yield of a conservatively managed company he follows closely: American Home Mortgage (AHM).

Thanks to the panic over subprime mortgages in the past few weeks, any stock even associated with the mortgage business has seen its price bludgeoned.

In the case of American Home, the panic's knocked it a third in a month to just $25.10 at the market close on Friday.

At these levels, the shares have a forecast dividend yield of 18.5%. That's right: 18.5%. The company is organized as a real estate investment trust, or REIT, which basically means it pays out all its earnings as dividends.

How vulnerable are those dividends?

Ackor notes that subprime mortgages made up less than 2% of American Home's business last year. And American Home chose to increase its latest dividend a week ago, even as the subprime panic was taking hold of the market. "American Home has been unfairly clumped together with the subprime originators," he argues, and "the company's decision to declare its 1Q '07 dividend of $1.12 suggests to us that business trends remain largely on track." His worst-case scenarios only see modest cuts in the dividend.

Best news of all? The insiders haven't been selling the shares. In fact, Michael Strauss, founder and chief executive, holds 9% of the stock and hasn't sold any since 2002, according to regulatory data tracked by Interactive Data Corp.

It's just one case that suggests Wall Street may, in places, have overreacted to the subprime lending fiasco and other fears that have reared their heads in the last month. Later in this column I'll discuss an ETF that could profit from the panic.

But for now, the question for subprime is how bad it is.