Analysts Sentiments
According to the data provided by Reuters, 43% of the analysts covering the stock recommend investors buy Two Harbors, while 36% rate the stock outperform. The remaining recommend investors hold Two in their portfolio and benefit from its elevated dividend yield, while none of them have a sell opinion.
Valuations
The company has an attractive valuation compared to most of its peers in the US. Two Harbors is currently trading at an 8% premium to its book value, while American Capital Agency, Armour Residential and MFA Financial are trading at a 3%, 1% and 28% premium to their respective book values. In contrast, Annaly Capital Management is trading at a 4% discount to its book value.
Competition
MFA Financial has been in business since 1998 and seeks to invest in both Agency and Non-Agency MBS. At the end of the third quarter, around 60% of the company’s asset portfolio was invested in Agency MBS, while the rest is non-Agency. Most of the non-Agency MBS are purchased at discounts to their par values and are considered very high quality. Within the Agency MBS, the company has a large concentration in 15-year fixed rate securities, which increases the prepayment protection, however a majority of it is not eligible for HARP. The company reported CPR of 21.6% for the third quarter, up from 20.4% at the end of the second quarter. MFA is currently yielding 8.9% and is trading at a 28% premium to its book value.
In contrast, American Capital Agency, Armour Residential, and Annaly Capital Management invest exclusively in Agency mortgage backed securities. American Capital’s recent earnings were positively impacted by a hike in asset yields, supported by a hike in the interest yielding assets during the quarter. Asset yields increased despite the challenging micro-environment, where the Fed is committed to keep the rates low and the yield curve flat. American Capital is believed to be a highly prepayment protected portfolio, like Armour Residential. Armor Residential is offering a dividend yield of 13.6%, while it is trading at 7% premium to its book value. Armour Residential has a large concentration in 15-year mortgage backed securities. In contrast, Annaly Capital has a large concentration in 30-year MBS. Annaly Capital’s asset yields and net interest spread were compressed again during the most recent quarter. However, the management managed expenses well during the fourth quarter, which is why they declined 36%.
Conclusion
I reiterate my bullish stance on Two Harbors. For the full year 2012, Two Harbors delivered a return on book value of 47% as measured by dividends declared and book value appreciation. The company is believed to have a very well diversified business mix, well supported by its financials. The hike in mortgage rates further eliminates the threat of any significant dividend decrease, which is why I believe a majority of the analysts covering the stock are supporting my bullish stance on Two Harbors.
The article Four Reasons to Buy This 18% Dividend Yielder originally appeared on Fool.com and is written by Adnan Khan.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
