Update: Two Harbors Announces Dividends But They May Be Unsustainable

| About: Two Harbors (TWO)
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Summary

Two Harbors Investment has just announced its latest quarterly dividend.

Recent earnings were not strong and I did not expect the dividend would fail to be covered with lower earnings which had me concerned with the sustainability of its dividend.

The present news is mildly bullish for the company and does not change my mildly bullish sentiment.

Two Harbors Investment (NYSE:TWO) has just announced its latest quarterly dividend. I am pleased that the company has maintained its dividend. The dividend will once again be $0.26 per share for the fourth quarter of 2014. This dividend is payable on January 20, 2015 to common shareholders of record at the close of business on December 30, 2014.

When I recently opined on TWO over the course of a two-part article I discussed why I liked the stock. I predicted that book value would expand as the company could generate better core earnings to cover its dividends. However, recent earnings were not strong and I did not expect the dividend would fail to be covered with lower earnings. This had me concerned with the sustainability of its dividend.

The present news is mildly bullish for the company. It is definitely a good thing for shareholders that the dividend was not cut. But the company has to deliver in Q4. It cannot continue to pay out less than what it's making. Now, for the most part the company followed the general trend of other companies in the mREIT sector showing quarter-over-quarter weakness earnings had declined quarter-over-quarter from $0.24 to $0.23 per share here in Q3, or $82.8 million in core income, failing to cover the dividend of $0.26. The net interest rate spread of 3.0% was a decline of 10 basis points quarter-over-quarter. In general, the quarter followed the general trend of the mREIT sector and was not meaningfully superior to or inferior to the average competitor. But investors, in my opinion, should still be concerned with the safety of the dividend. At its current yield of 10.5%, I still rate the company a moderate buy, but I am very much looking forward to the Q4 earnings report. That said, I think the quarter will be decent given the company's strategic initiatives and well-diversified portfolio as I laid out in the past when I initiated coverage.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.