First let me clear up some confusion about the current situation with Two Harbors Investment Corp. (TWO). The following are directly taken from their earnings report [see transcript] and I take them as facts:
- 17.8 million shares of common stock in Silver Bay Realty Trust Corp. (SBY) are owned by Two Harbors. These shares are subject to a 90-day lockup, which expires in mid-March.
- Subject to the approval of the Board, the shares intend to be distributed to the shareholders by means of a special dividend at some point following the expiration of the 90-day lockup period.
- The dividend will not remain $.55.
The $0.55 dividend was also, we believe, important in terms of timing for our shareholders, given changes to tax policy in 2013. It should not be taken that this dividend level is representative of our ongoing earnings power.
Tom Siering - Two Harbors Investment Corp. - President, CEO.
Many people are talking about how many shares of Silver Bay Realty Trust Corp. they will get. However, it's not correct to assume the amount per share of TWO currently, as there are things that could influence the amount of outstanding shares between now and the distribution of the shares.
Last year had great returns - there is no argument against that - but that doesn't make a good investment this year. This one of my favorite stocks to follow, and everyone seems to have the fever to get in on the ride up. You may not want to hear this, but you missed the boat, and let me tell you why.
Two Harbors Investment Corp. was trading a mere $.12 off its all-time high on the close, Feb. 14 with a price of $12.54. First Call and Thomson Reuters both have a mean 12-Month Price Target of $12.50. This is an estimated -.31% return in price this year compared to the exceptional price return shareholders had in 2012.
Over the past four quarters, the company has reported 0 positive, 3 negative, and 1 in-line surprises for quarterly earnings per share. Two Harbors Corp. has an estimated EPS growth rate of -1.7%. The EPS estimate for the first quarter in 2013 is currently at $.33, but over the last four weeks analysts have made 3 downward estimate revisions.
There is no doubt they won't be able to maintain a $.55 dividend, but what is a more accurate estimate? Many people are arguing and just go back and forth making up numbers instead of providing a basis for their thought. How about this:
- 2010 with an annual EPS of $1.30 they paid a dividend of $1.48 per share.
- 2011 with an annual EPS of $1.55 they paid a dividend of $1.60 per share.
- 2012 with an annual EPS of $1.28 they paid a dividend of $1.71 per share - remember the effect the $.55 dividend had on the annual dividend.
- 2013 with an estimated EPS of $1.32, which is likely to be downgraded.
I disagree with the seeming consensus on the message boards that the dividend will be back to the annual level of $1.60. My estimate is for an annual dividend of $1.50. As said in the conference call, "We will have a minimum taxable income carryover of $11 million into 2013" [Brad Farrell, Two Harbors Investment Corp. CFO, Treasurer]. This can help pay a first quarter dividend of $.40, and then it is likely the dividend will drop to $.36 for the remaining three quarters for a total of $1.50. At the current price of $12.54 that is a yield of nearly 12%, which is still very attractive.
To reiterate my point, we cannot be sure on the exact returns from the dividend and the returns from an increase in stock price are likely to be fantasy, or at least much less this year. Not to mention, it seems like they have terrific EPS growth, but in reality Two Harbors Investment Corp. has had an average of -.4% EPS during the last 5 years and is expected to have a -2.2% Annual EPS growth rate over the next 5 years. (These estimates were pulled from the First Call Earnings Valuation Report, which uses the analysts' estimates).
Other companies in the same industry with high dividends:
New York Mortgage Trust Inc. (NYMT) - 15.6% Yield
American Capital Agency Corp. (AGNC) - 15.4% Yield
Armour Residential REIT, Inc. (ARR) - 13.50% Yield
Apollo Residential Mortgage, Inc. (AMTG) - 12.4% Yield
Hatteras Financial Corp. (HTS) - 10.30% Yield
PennyMac Mortgage Investment Trust (PMT) - 8.8% Yield