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Dynex Capital Is The Best Buy In The MREIT Sector

|About:Dynex Capital Inc. (DX) Includes:AGNC Investment Corp. (AGNC), MTGE, NLY

Introduction

The mREITs have had a relatively quiet ride regarding rates over the last six months; however, their share prices have climbed a little bit with a little more clarity on the future of rates and the QE reductions.

Over the last 52 weeks Annaly Capital Management, Inc. (NYSE:NLY) is down 7.1%, American Capital Agency Corp. (NASDAQ:AGNC) is up 4.8%, American Capital Mortgage Investment (NASDAQ:MTGE) is up 6.4%, and Dynex Capital Inc. (NYSE:DX) is down 16%.

I believe Dynex Capital Inc is best positioned to handle the impending rate hikes and likely to be the most stabile out of all four that I follow closely. I also believe the greatest upside and gains are to be found in DX.

I'll look a little more closely at the two that are down over the last 52 weeks, Annaly Capital and Dynex Capital.

The Facts

 

NLY

DX

BV 1st Quarter end

$12.30

$8.87

BV 4th Quarter end

$12.13

$8.69

Closing price July 18, 2014

$11.23

$8.45

Spread 1st Quarter

0.90%

1.88%

Spread 4th Quarter

1.43%

1.77%

1st Qtr Est. Taxable inc(Core Earnings)

$0.23

$0.25

12-month FFO (thru 1st Qtr)

-4.71 Bil

208.8 Mil (Q4)

12-month dividends (thru 1st Qtr)

1.50 Bil

69.3 Mil (Q4)

1st Quarter dividend

$0.30

$0.25

1st Qtr CPR

6%

10.3%

4th Qtr CPR

7%

11.7%

(Source: Cash King)

Both, a matter of fact, all four mREITs are at a discount to their Book Value as of their last quarter end. Also, since rates have performed rather favorably over the last 3 to 6 months all have likely posted further gains to book value since last quarter.

I consider all four a buy in my portfolio but DX remains the best buy. Between NLY and DX, DX increased their spread in the last quarter while NLY's fell. Also, Taxable Income/Core Earnings for DX covered their dividend while NLY's fell short. CPR fell in both cases as well. Where my huge bullishness in DX comes from is when I recently updated my annual numbers with DX. Take a look at these trends with DX:

 

2008

2009

2010

2011

2012

2013

2014(proj)

OCF

$6.6M

$19.6M

$30.1M

$70.6M

$149.4M

$208.8M

$200.0M

FCF/Share

$0.40

$1.14

$1.44

$1.83

$2.72

$3.37

$3.23

Dvds/Share

$0.71

$0.92

$0.98

$1.09

$1.15

$1.12

$1.00

FCF payout

177.4%

80.78%

68.12%

59.64%

42.22%

33.20%

31.00%

(Source: Cash King)

As can be seen here DX has managed to increase Operating Cash Flow, increase Free Cash Flow per share, and decrease the Free Cash Flow payout ratio year after year since at least 2008.

Going Forward

I believe DX will face an uphill climb to continue this trend in 2014 due to the horrible environment that entailed with the mREITs towards the end of 2013. Some of this filtered into DX's Q1 report. My $200 Million projection for Operating Cash Flow is only a 4% decrease from last year and easily attainable. DX in Q1 produced just shy of $50 Million so all they need to do is maintain that. Any increase means they may be able to still post an increase for the year. Due to their decreased dividend their FCF payout continues to decrease further making it easier and more likely they will raise dividends at some point in the near future.

Despite a couple of dividend drops they still have a 5yr DGR of a little over 6%. This is far superior to most of the other mREITs. Lastly and often not talked about is DX has been around since 1987, longer than NLY, so they have a long track record of success.

Disclosure: The author is long DX, MTGE, AGNC, NLY, MORL. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Stocks: AGNC, MTGE, NLY, DX