Monthly Dividend Stock In Focus: Dynex Capital

Up to date on Could nineteenth, 2021 by Bob Ciura

Dynex Capital (DX) is a mortgage Actual Property Funding Belief (mREIT) that provides a an interesting 8% yield, making it a doubtlessly enticing excessive yield inventory.

Dynex Capital additionally pays its dividends on a month-to-month foundation, which is uncommon in a world the place the overwhelming majority of corporations that pay a dividend, pay them quarterly.

There are presently solely 56 corporations with month-to-month dividend funds. You may see the complete listing of month-to-month dividend shares (together with related monetary metrics akin 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, although its dividend cost has been declining lately.

Nonetheless, 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 the USA. It invests in company and non-agency MBS consisting of residential MBS, industrial MBS (CMBS), and CMBS interest-only securities.

Company MBS have a warranty of principal cost by an company of the U.S. authorities or a U.S. government-sponsored entity, akin to Fannie Mae and Freddie Mac. Non-Company MBS haven’t any such warranty of cost. Dynex Capital, Inc. was based in 1987 and is headquartered in Glen Allen, Virginia.

The corporate is structured to have inner administration, which is usually optimistic as a result of it may possibly cut back conflicts of curiosity. Moreover, once they enhance whole fairness, there isn’t any materials influence on working bills. Over time, Dynex’s administration crew has constructed a powerful monitor file of producing enticing whole returns for shareholders:

Supply: Investor presentation

Dynex’s portfolio is structured to be extensively diversified throughout residential and industrial company securities. This diversified strategy creates a horny risk-to-reward steadiness that has benefited the corporate for a few years. Over time, the combination of CMBS and RMBS investments has decreased the unfavorable impacts of prepayments on portfolio returns. Moreover, company CMBS acts as a cushion within the occasion of surprising volatility in rates of interest.

Lastly, the high-quality CMBS IO are chosen for shorter period and better yield, with the supposed influence of limiting portfolio volatility. A good portion of Dynex’s Company 30-year RMBS mounted price portfolio has prepayment safety by way of limits on incentives to refinance.

Administration anticipates opportunistically growing leverage within the high-quality asset portfolio whereas avoiding credit score delicate property which are leveraged with quick time period financing. Consequently, the corporate enjoys a extremely versatile portfolio that frees administration to quickly pivot to different enticing alternatives as markets stay risky.

The belief reported first–quarter outcomes on April 28th, 2021. Core web working revenue per share got here in at $0.46, up from $0.45 sequentially. Web curiosity revenue fell from $14.4 million to $12.3 million quarter–over–quarter and adjusted web curiosity revenue fell to $20.8 million from $20.9 million sequentially.

The belief additionally reported 6.9x in leverage together with TBA greenback as of March 31, 2021, in comparison with 6.3x as of December 31, 2020. Book worth per widespread share stood at $20.70 as of March 31st, 2021 up from $19.08 on December 31st, 2020.

Progress Prospects

On condition 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 doubtless undergo considerably. It is because the economies of the world will proceed to be weighed down by massive swimming pools of unfavorable yielding debt, forcing central banks to stay accommodative of their financial coverage.

That being stated, such a low-yield setting creates a chance in top quality real-asset backed loans. Whereas quite a few short-term headwinds stay (as we’ll talk about subsequent), 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 move that their enterprise can generate, thereby boosting valuations and making attracting capital simpler for mortgage REITs. Second, because the Federal Reserve makes an attempt to scale 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 added 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 embody the corporate’s skilled administration crew with experience in managing securitized actual property property via 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 danger, and the enticing dividend yield.

Threat Concerns

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 as a result of extraordinarily low Fed Funds price.

That being stated, the belief’s normalized diluted earnings per share had been truly fairly steady via the final recession, although shares nonetheless bought off very closely, shedding 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 danger is that prepayment speeds might rise attributable to seasonal elements. Moreover, the drop in mortgage charges might enhance refinancing exercise, additional slicing into earnings.

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 doubtless be some misplaced earnings. 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, as the corporate paid a $0.39 per share dividend within the quarter. On the similar time, Dynex delivered core web working revenue per share got here of $0.46.

Together with dividends distributed to this point in 2021, in addition to these anticipated for the remainder of the yr, Dynex pays out $1.56 of dividends this yr. Based mostly off of the current closing value of $19.70, shares have a yield of seven.9% immediately. On the floor, Dynex seems to be a horny high-yield dividend inventory.

Importantly, the dividend seems lined. We anticipate Dynex to supply $1.87 of core working EPS in 2021. This places the anticipated payout ratio at 83%, making it potential that the dividend may be maintained, barring a big decline in working EPS.

Closing Ideas

Dynex Capital’s excessive dividend yield and month-to-month dividend funds make it stand out to high-yield dividend buyers. Nonetheless, we stay extraordinarily cautious on the inventory.

The corporate is protecting its dividend in the intervening time. However the riskiness of the enterprise mannequin units up Dynex for doubtlessly steep losses if the economic system slips into recession and defaults rise. We additionally discover shares to be overvalued, with a 2021 P/E of 10.5 in contrast with our truthful worth P/E of 8.

This makes the inventory pretty dangerous. Regardless of the excessive dividend yield, buyers in search of month-to-month revenue have higher decisions with extra favorable progress prospects, and safer dividends.