Up to date on April eleventh, 2022 by Quinn Mohammed
Dynex Capital (DX) is a mortgage Actual Property Funding Belief (mREIT) that provides an interesting 9.9% yield, making it a doubtlessly engaging excessive yield inventory.
Dynex Capital additionally pays its dividends on a month-to-month foundation. That is uncommon in a world the place the overwhelming majority of firms pay them quarterly.
There are at the moment solely 52 firms with month-to-month dividend funds. You may see the complete listing of month-to-month dividend shares (together with related monetary metrics corresponding to dividend yields, payout ratios, and extra) by clicking on the hyperlink beneath:
Dynex Capital’s excessive dividend yield and month-to-month dividend funds make it an intriguing inventory for dividend buyers, despite the fact that its dividend fee has been declining lately.
Nevertheless, as with many high-dividend shares, the sustainability of the dividend is a vital consideration. This text will analyze the funding prospects of Dynex Capital.
Enterprise Overview
Dynex Capital is a mortgage Actual Property Funding Belief. As a mortgage REIT, Dynex Capital invests in mortgage-backed securities (MBS) on a leveraged foundation in america. It invests in company and non-agency MBS consisting of residential MBS, business MBS (CMBS), and CMBS interest-only securities.
Company MBS have a warranty of principal fee by an company of the U.S. authorities or a U.S. government-sponsored entity, corresponding to Fannie Mae and Freddie Mac. Non-Company MBS haven’t any such warranty of fee. Dynex Capital, Inc. was based in 1987 and is headquartered in Glen Allen, Virginia.
The corporate is structured to have inside administration, which is usually optimistic as a result of it may cut back conflicts of curiosity. Moreover, after they enhance whole fairness, there is no such thing as a materials affect on working bills. Over time, Dynex’s administration workforce has constructed a robust monitor report of producing engaging whole returns for shareholders:
Supply: Investor presentation
Dynex’s portfolio is structured to be broadly diversified throughout residential and business company securities. This diversified strategy creates a lovely risk-to-reward stability that has benefited the corporate for a few years. Over time, the combo of CMBS and RMBS investments has decreased the adverse impacts of prepayments on portfolio returns. Moreover, company CMBS acts as a cushion within the occasion of sudden volatility in rates of interest.
Lastly, the high-quality CMBS IO are chosen for shorter period and better yield, with the meant affect of limiting portfolio volatility. A good portion of Dynex’s Company 30-year RMBS mounted fee portfolio has prepayment safety by way of limits on incentives to refinance.
Administration anticipates opportunistically rising leverage within the high-quality asset portfolio whereas avoiding credit score delicate belongings which are leveraged with brief time period financing. Consequently, the corporate enjoys a extremely versatile portfolio that frees administration to quickly pivot to different engaging alternatives as markets stay risky.
The belief reported fourth-quarter outcomes on February 3rd, 2022. Earnings obtainable for distribution per share got here in at $0.45 for the quarter, and $1.97 for the complete 12 months 2021. Web curiosity earnings rose 8.3% to $15.6 million year-over-year in This fall. And adjusted web curiosity earnings fell to $25.1 million from $97.9 million within the prior 12 months.
The belief additionally reported 5.8x in leverage, inclusive of TBA greenback roll positions, as of December 31st, 2021. This compares favorably to six.3x as of December thirty first, 2020. E-book worth per frequent share stood at $17.99 as of December thirty first, 2021, down from $19.08 one 12 months earlier than.
Development Prospects
Provided that rates of interest are anticipated to stay in a narrower and decrease vary for an extended interval than ever seen in current historical past, returns will probably undergo considerably. It’s because the economies of the world will proceed to be weighed down by massive swimming pools of adverse yielding debt, forcing central banks to stay accommodative of their financial coverage.
That being mentioned, such a low-yield surroundings creates a possibility in top quality real-asset backed loans. Whereas quite a few short-term headwinds stay, Dynex nonetheless advantages from a number of long-term elements that would allow them to proceed rising.
First, an getting older inhabitants in a low yield world ought to foster a rising demand for the money movement that their enterprise can generate. This may enhance valuations and make attracting capital simpler for mortgage REITs. Second, because the Federal Reserve makes an attempt to cut back its funding in Company RMBS and GSE reform opens new funding alternatives, demand for personal capital within the US housing finance system ought to develop.
Third, the scarcity of reasonably priced housing means that there’s a want for extra funding into the sector.
Supply: Investor Presentation
Lastly, Dynex brings to the desk a number of aggressive benefits which ought to allow it to generate sturdy returns for buyers all through enterprise cycles on the again of those long-term tailwinds.
These embrace the corporate’s skilled administration workforce with experience in managing securitized actual property belongings by means of a number of financial cycles. It additionally consists of their emphasis on sustaining a diversified pool of extremely liquid mortgage investments with minimal credit score threat, and the engaging dividend yield.
Aggressive Benefit & Recession Efficiency
Whereas the long-term outlook is extra promising, a number of challenges stay within the close to time period. First, this features a shrinking unfold between 3-month LIBOR and short-term repo charges as repo charges stay elevated because of the extraordinarily low Fed Funds fee.
That being mentioned, the belief’s normalized diluted earnings per share had been truly fairly secure by means of the final recession, although shares nonetheless offered off very closely, dropping about 40% of their market worth. All in all, there’s little margin of security right here due largely to the payout ratio being so excessive, mixed with extremely risky earnings-per-share.
One other threat is that prepayment speeds may rise attributable to seasonal elements. Moreover, the drop in mortgage charges may enhance refinancing exercise, additional slicing into income.
Whereas some cash-out refinancing is already factored into the corporate’s prepayment expectations and their portfolio has been structured to hedge in opposition to a few of this, there’ll nonetheless probably be some misplaced income. This explains the corporate’s current sample of dividend reductions since 2019.
Dividend Evaluation
The most recent earnings outcomes revealed a dividend that seems lined by earnings. The corporate paid a $0.39 per share dividend within the quarter. On the similar time, Dynex delivered earnings obtainable for distribution per share of $0.45.
Based mostly on its present $0.13 month-to-month dividend, Dynex pays out $1.56 of dividends this 12 months. Based mostly off of the current closing value of $15.77, shares have a yield of 9.9% as we speak. On the floor, Dynex seems to be a lovely high-yield dividend inventory.
Importantly, the dividend seems lined. We count on Dynex to supply $1.79 of earnings obtainable for distribution in 2022. This places the anticipated payout ratio at 87%, making it attainable that the dividend will be maintained, barring a major decline in earnings obtainable for distribution.
Remaining Ideas
Dynex Capital’s excessive dividend yield and month-to-month dividend funds make it stand out to high-yield dividend buyers. Nevertheless, we stay extraordinarily cautious on the inventory.
The corporate is masking its dividend in the interim. However the riskiness of the enterprise mannequin units up Dynex for doubtlessly steep losses if the financial system slips into recession and defaults rise. Shares additionally seem overvalued, with a 2022 P/E of 8.8 in contrast with our truthful worth P/E of 8.0.
This makes the inventory pretty dangerous. Regardless of the excessive dividend yield, buyers in search of month-to-month earnings have higher decisions with extra favorable development prospects, and safer dividends.
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