This column originally appeared exclusively first for Stock Investor Cheat Sheet premium subscribers on May 20th and has been updated to reflect current data changes.
With shares of Dynex Capital Inc. (NYSE:DX) trading at around $10.63, is DX an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock's Movement
Dynex Capital, Inc. is a real estate investment trust, or REIT, which invests in mortgage loans and securities on a leveraged basis. The company invests in both Agency and non-Agency securitized mortgage products. The company also has investments in securitized single-family residential and commercial mortgage loans originated by the Company from 1992 to 1998. The company finances it investments through a combination of repurchase agreements, securitization financing, and equity capital.
Since Dynex Capital is a REIT, 90 percent of all taxable income must go to shareholders. This is what makes REITs so appealing to savvy dividend investors. And in this case, the dividend yield is an impressive 10.68 percent. Another big selling point for Dynex Capital is that it held up relatively well during the financial crisis. The stock lost just over 30 percent, which was nothing compared to most stocks throughout the broader market. There was also a generous yield to make up for those losses. Dynex Capital has since recouped all those losses and more.
Revenue has consistently improved on an annual basis, and earnings have been steady. As far as the last quarter (Q1) goes, diluted EPS came in at $0.34, which was a slight increase year-over-year. Revenue also increased year-over-year. There is a chart on the next page showing annual and quarterly revenue and earnings.
Getting back to Q1 results, net income increased to $22.5 million from $21.1 million in Q4 2013. General administration expenses were $3.8 million compared to $3.5 million in Q4 2013, but this increase was seasonal. The investment portfolio has increased. For example, in Q1, Dynex Capital purchased $636.0 million in MBS investments.
Mr. Thomas Akin, Chairman and Chief Executive Officer, made the following comments about the quarter:
“Our first quarter results were excellent. Our book value per common share increased by $0.20 even as interest rates increased during the quarter. Net interest income increased to $22.5 million for this quarter from $21.1 million in the prior quarter. Return on average common equity remained the same as the fourth quarter of 2012 at 13.0%. Our performance was driven significantly by our focus over the past twelve months on CMBS investments, which now represent 61% of our invested capital. The Series B preferred stock we issued in April 2013 helps to diversify our capital base while lowering our average cost of equity capital. We now have fully invested the proceeds of this issuance at accretive returns to our shareholders. We believe that our portfolio is well positioned in this low-rate and uncertain environment.”
Let's take a look at some numbers before forming an opinion on the stock. The chart below compares fundamentals for Dynex Capital, Capstead Mortgage Corp. (NYSE:CMO), and iStar Financial Inc. (NYSE:SFI).
| DX | CMO | SFI | |
| Trailing P/E | 7.82 | 8.94 | N/A |
| Forward P/E | N/A | 9.08 | N/A |
| Profit Margin | 85.18% | 91.80% | N/A |
| ROE | 13.35% | 10.61% | -16.98% |
| Operating Cash Flow | N/A | 271.33M | -223.75M |
| Dividend Yield | 10.60% | 9.60% | N/A |
| Short Position | 2.80% | 2.10% | 20.60% |
Let's take a look at some more important numbers prior to forming an opinion on this stock.
T = Technicals Are Strong
Dynex Capital and its peers have performed very well over the past three years. There have been no signs of a slowdown.
| 1 Month | Year-To-Date | 1 Year | 3 Year | |
| DX | 1.05% | 15.67% | 28.13% | 63.37% |
| CMO | -6.02% | 9.44% | -0.46% | 63.49% |
| SFI | 6.18% | 45.52% | 101.40% | 106.30% |
At $10.63, Dynex Capital is trading above its averages.
| 50-Day SMA | 10.63 |
| 200-Day SMA | 10.22 |
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for Dynex Capital is weaker than the industry average of 1.70, but high debt-to-equity ratios are normal for the industry. Is there room for improvement? Yes, but it’s not an issue in the current environment.
| Debt-To-Equity | Cash | Long-Term Debt | |
| DX | 5.96 | 44.13M | 3.77B |
| CMO | 8.69 | 471.62M | 12.95B |
| SFI | 3.07 | 478.92M | 4.50B |
E = Earnings Are Strong
Earnings have been steady, and revenue has consistently improved on an annual basis.
| Fiscal Year | 2008 | 2009 | 2010 | 2011 | 2012 |
| Revenue ($) in millions | 30 | 39 | 49 | 83 | 114 |
| Diluted EPS ($) | 0.91 | 1.02 | 1.41 | 1.03 | 1.35 |
When we look at the last quarter on a year-over-year basis, we see a significant increase in revenue and a slight increase in earnings.
| Quarter | Mar. 31, 2012 | Jun. 30, 2012 | Sep. 30, 2012 | Dec. 31, 2012 | Mar. 31, 2013 |
| Revenue ($) in millions | 26.27 | 29.99 | 31.84 | 33.51 | 32.98 |
| Diluted EPS ($) | 0.33 | 0.35 | 0.34 | 0.34 | 0.34 |
Now let's take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?
T = Trends Support the Industry
REITs have performed very well over the past several years. Investors have been forced out of fixed income investments, which has left them searching for high-yielding stocks that offer at least some resiliency if the market were to suffer a steep correction. REITs fit the bill.
Conclusion
With steadily increasing revenue, a superb yield, trends supporting the industry, and decent resiliency, potential rewards outweigh downside risks.
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