CIM.PR.A trades 10.7% above our buy target with a 9.27% yield, while sibling CIM.PR.B yields 10.24% near fair value from the same issuer with identical credit risk.
Alpha Score of 68 reflects moderate overall profile with strong momentum, strong value, weak quality, moderate sentiment.
Chimera Investment Corporation's preferred share CIM.PR.A looks cheap at first glance. At roughly $22 a share, with a stripped yield around 9.27%, it draws attention from income investors. But the math gets less attractive once you compare it to CIM.PR.B, another Chimera preferred that currently yields about 10.24% and trades much closer to fair value.
CIM.A sits at 110.7% of the buy target we calculate for the series. That pushes it into overpriced territory. CIM.B, by contrast, trades around 100.3% of its target – barely outside buy range – despite carrying an identical credit risk from the same issuer.
The main reason an investor might prefer CIM.A is its fixed 8% coupon. CIM.B floats, so its payout would drop if short-term rates decline. That fixed-rate protection is real, but the premium the market demands for it looks excessive given the alternative.
The call feature adds another layer. CIM.A has an annualized yield to call of 480%, calculated from the gap between the $22 trading price and the $25 call value. That figure is a mathematical artifact, not a realistic return. Chimera has no incentive to call shares at $25 when it can buy them on the open market for $22. The gain from an early call is effectively hypothetical.
Risk is worth measuring, too. Chimera's ratio of common equity to preferred liquidation value stands at roughly 1.2x, a thin cushion. Preferred shareholders sit ahead of common in the capital structure, but we generally prefer seeing a larger buffer for a safety-rated series. That thin coverage is a major reason we assign the preferred shares a risk rating of 4 on our 1-to-5 scale.
CIM.A isn't a bad security. It just carries a bad valuation. Investors pay roughly 10% above our buy target for the fixed-rate feature, while CIM.B yields more and trades near fair value. We currently hold CIM.B and see it as the best relative value in Chimera's preferred stack.
The rate environment adds to the case. Short-term rates have been trending higher, and the market is pricing in potential Fed hikes. If rates rise, CIM.B's floating dividend could increase, boosting its effective yield. The fixed-rate protection on CIM.A becomes less valuable in that scenario.
We rarely issue outright sell ratings on preferred shares because total returns are seldom negative over a 12-month horizon – a 9% dividend can offset a 7% price decline, producing a small positive return. But the risk-reward for CIM.A looks poor relative to alternatives, especially another Chimera preferred with the same issuer risk and a higher yield.
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