Two Harbors Reduces Dividend - Analyst Blog

By Zacks | September 13, 2012 AAA

Two Harbors Investment Corp. (TWO), a real estate investment trust (REIT) that primarily invests in residential mortgage-backed securities (RMBS), has recently reduced its quarterly dividend from 40 cents to 36 cents per share for the third quarter of 2012. The dividend is payable on October 22, 2012, to shareholders of record on September 24.

The current dividend equates to a 10% year-over-year decrease in the dividend payout and is based on the evaluation of the present market scenario. The company's investment strategy takes a holistic view of the rapidly evolving market and deploys a dynamic capital allocation approach to focus on the relative value of the various sectors within the mortgage market.

Based on the closing price of $11.90, the current dividend yield is fairly impressive at approximately 12.1%. A steady dividend payout facilitates the long-term strategy of Two Harbors to provide attractive risk-adjusted returns to its stockholders. The company has also historically promulgated a dividend reinvestment and direct stock purchase plan through which stockholders may purchase additional shares of the company by reinvesting some or all of the cash dividends received on the common shares.

Investors looking for high dividend yields are increasingly favoring REITs like Two Harbors. Solid dividend payouts are arguably the biggest enticement for REIT investors as U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders.

Two Harbors primarily acquires, owns and manages a portfolio of Agency and non-Agency RMBS and related investments. The company is externally managed and advised by PRCM Advisers LLC, a wholly owned subsidiary of Pine River Capital Management L.P.

Agency RMBS are those where principal and interest payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae, Freddie Mac and Ginnie Mae. On the other hand, non-Agency RMBS are neither issued nor guaranteed by the government-affiliated agencies.

The residential mortgage market in the U.S. has experienced defaults, credit losses and liquidity concerns in the recent past. These factors have impacted investor perception of the risks associated with real estate related assets, including agency securities and other high-quality RMBS assets.

As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance of Two Harbors in the future.

We presently have a Neutral recommendation on Two Harbors, which currently has a Zacks #3 Rank that indicates a short-term Hold rating. However, we have an Outperform recommendation and a Zacks #1 Rank (short-term Strong Buy rating) for Redwood Trust Inc. (RWT), one of the competitors of Two Harbors.

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