Each week, I select a stock to analyze for dividend safety based on readers’ requests. Last week in this column, I covered a mortgage real estate investment trust (REIT) with a 12% yield but a poor grade for dividend safety. Nearly all of the requests for this week were for other high-yielding mortgage REITs.
Two Harbors Investment Corp. (NYSE: TWO) is a New York-based mortgage REIT with a fat 14.1% yield. Is it sustainable?
Last year, the company generated $350 million in net interest income (NII), the measure of cash flow used by mortgage REITs. It paid out $329 million in dividends. There are no official Wall Street estimates for what NII should be this year or next year, but revenue and earnings are forecast to fall off a cliff.
Revenue declined slightly in 2018 from $779 million to $767 million. This year, it will be more than cut in half to $345 million, and it will fall further to $332 million in 2020.
Earnings are expected to decline, so it makes sense that NII would also drop swiftly. The problem is Two Harbors doesn’t have much room before the company can no longer afford its dividend.
The $350 million in NII earned last year was on $767 million in revenue. So it is extremely likely that with half of the revenue in 2019, NII will fall precipitously and the dividend will be in jeopardy.
In fact, in the first quarter, NII was $82 million, while the company paid out about $119 million in dividends.
Two Harbors has also shown that it will cut the dividend when it needs to. Since 2012, management has reduced the dividend five times.
The dividend is higher today than it was in 2012, but now the company can’t afford it. That 14% yield is exciting, I know, but don’t get used to it.
Given its history of dividend cuts in the past, I expect Two Harbors to reduce its dividend again in 2019.
Dividend Safety Rating: F
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