Southern Company and Duke Energy, Which Would I Prefer?

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Looking at some utility companies

The publicly listed utility companies have underperformed the broader stock market so far this year. This early, taking a look at some of these companies’ financials and determining a possible investment seems logical since utilities always provide dividends to its shareholders.

The two companies first tackled here are Duke Energy and Southern Company. According to Reuters, the companies have 4.52% and 5.24% dividend yields, respectively.

In current market capitalization, the older Duke Energy is bigger than Southern Company by $10.7 billion at $55.2 billion.

As of its recent filing, Duke also had a book value of $41.6 billion compared to Southern’s $24 billion.

As per Duke’s recent business performance that ended in September 2017, the utility delivered 3.5% growth in revenue, while -0.97% decline in profits. Southern, on the other hand, generated 18.3% rise in revenue and 85% drop in profits.

Southern recorded good amount of increase in revenue secondary to its Southern Company Gas.
As per related filings, Southern Company acquired AGL Resources in June 2016 for ~$8 billion creating the Southern Company Gas. The Southern Company Gas business accounted for $2.3 billion increase in Southern’s operating revenues.

Duke Energy, meanwhile, had gotten itself too in acquiring another gas company, Piedmont, for $4.9 billion about months after Southern announced its acquisition in mid 2015.

Gas revenues for Duke and Southern rose 230% and 430%, respectively, while operating expenses climbed 4% and 47% thus leaving Southern with much less profits in the period.

Duke also had total debt of $53.3 billion (1.3x debt-equity ratio) compared to Southern’s $50 billion (2.08x).

In the past three years, Duke accumulated $9 million in free cash flow and taking in $1 billion in financing activities while Southern generated outflows of $3.7 billion and took in $18.1 billion in financing.

Duke has fallen 6.3% year-to-date while Southern fell 7.86%.

Having applied historical book value growth figures and a conservative 20% margin indicated that Duke and Southern market prices were overvalued by 50% and 115%, respectively.

In summary, Duke may still be seen as of a bit cheaper than Southern at current prices but still is overvalued.

 

Too Late To Catch a 20% Yield: Siemens Gamesa

Siemens Gamesa Renewable Energy appears to be promising

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Stock: Siemens Gamesa Renewable Energy SA 0H4N, GCTAF, GCTAY 

Siemens Gamesa Renewable Energy, a €7.2 billion 40-year-old Europe-based company, is the world’s fourth-largest Original Equipment Manufacturer (OEM) in the onshore wind industry.

The company has had an unimaginable 20% trailing dividend yield.

In further observation, however, the dividend appeared to be unsustainable given that the Zamudio, Vizcaya, Spain-based company has just provided a little more than €1 billion in payouts while having generated just €176 million in profits in the recent 12 months of its operations.

As it turned out, Siemens Gamesa Renewable Energy (Siemens Gamesa) paid out €1.07 billion in extraordinary and ordinary dividends just in the period between April to September 2017 secondary to its recent merger agreement.

The company paid out (€3.6/share) and an ordinary dividend (€0.11/share) in the recent six months.

According to filings, Siemens Gamesa is the result of merging Siemens Wind Power, which is the wind power division of Siemens AG, with Gamesa Corporación Tecnológica (Gamesa).

As reported in 2016, Siemens Gamesa Renewable Energy is to be 59%-owned by Siemens AG and 41%-owned by Gamesa Corporacion shareholders.

Siemens Gamesa engages in wind turbine development, manufacture and sale (Wind Turbine division) and provides operation and maintenance services (Services division).

As reported by the Wall Street Journal, the Siemens-Gamesa merger would create a new global market leader in wind energy by capacity, surpassing China’s Xinjiang Goldwind Science & Technology, Denmark’s Vestas Wind Systems, and General Electric, according to FTI Consulting.

Meanwhile, Siemens-Gamesa reported poor €135 million losses on revenue of €5 billion in its April to September operations.

*Statement of Simens-Gamesa (highlights by author)

The group’s financial results in the second half of 2017 (the first six-month period in which the merged company was operational) reflect the impact of higher volatility in some of the company’s main markets, such as India and the US. That volatility is the result of the transition towards fully competitive wind energy models, which has resulted in a decline in onshore sales volume and also in an inventory impairment, with no cash impact, as a result of price pressure in those markets.

Consequently, sales in the six-month period declined by 12% with respect to the pro-forma sales figure for the same period of the previous year, and the underlying EBIT margin, excluding the impact of the PPA, stood at 3.8% , and at 6.5% excluding the inventory impairment. Excluding the impact of the hiatus in the Indian market, which was main cause of the decline in sales volumes, group sales fell by 2.4% year-on-year, mainly due to the currency effect, and the underlying EBIT margin pre-PPA and before the inventory impairment was 7.3%. The company ended the period with a net cash position of €377 million, after paying out a €3.6/share special dividend in April as part of the merger agreement, and a €0.11 ordinary dividend out of 2016 earnings.

Although all of these business reduction results seemed disappointing and obviously unappealing, Siemens Gamesa reported that excluding the halt in the Indian market business, the company would have had a 2.4% revenue reduction instead.

The company also stated that it experienced a temporary suspension in the Indian market, but also the reduction in installations in the UK.

Siemens Gamesa also expects that its business in the Indian market will normalize in 2019.

In September 2017, the company also bagged a project to develop India’s first large-scale commercial hybrid wind-solar project.

 “Siemens’s offshore [wind business] is a world market leader, but offshore alone is not enough to become profitable,” said Christoph Niesel, a portfolio manager at Union Investment, a Siemens investor. Mr. Niesel said the deal with Gamesa would allow Siemens to fill this hole in the business (The Hindu Business Line)

As of September, Siemens Gamesa had nearly €7 billion in goodwill and intangible assets, €1.28 billion in debt, €1.7 billion in cash and cash equivalents, and €6.45 billion in book value (vs. market cap  €7.2 billion).

Buying shares of the Siemens Gamesa as of the moment may be a little late if one is trying to have that 20% yield payout, and maybe a little early in anticipation of improved results in the coming future.

In addition, having negative cash flow and having increased its overall debt by €230 million since March of this year may indicate a pass. Some speculative investors may want to capture the newly merged wind company’s shares as it already had provided -11.7% total losses so far this year.

There’s no telling when Siemens Gamesa may deliver healthy positive free cash flow and consistent earnings, but somehow the company sees its operations better by the year 2019.

Meanwhile, the company is a pass.

Disclosure: I have GE notes.

Thoughts on a Dividend Provider: Dominion Energy

Poor free cash flow generation leads to a pass
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Dominion Energy (ticker D), a $50.7 billion Virginia-based energy producer and transporter, is set to report its third-quarter results on October 30, Monday. So far this year, Dominion Energy has underperformed the broader S&P 500 index has generated 6.14% total returns vs. the index’s 16.07%.

Nonetheless, the company has a trailing 3.75% dividend yield with 84% payout ratio in the recent 12 months. Take note, however, that Dominion also raised $850 million from share issuances, therefore, diluting its existing shareholders’ ownership as a result.

In its recent six months operations that ended in June, Dominion recorded 12.2% revenue growth from last year to $6.2 billion and 4.7% higher in profits to $1.02 billion. Meanwhile, total expenses rose by $415 million (or 10.8%) resulting to profit margin that was 119 basis point lower than its year-ago period.

Dominion also carried $260 million in cash and cash equivalents as of June ($117 million lower than a year earlier), and $37 billion in debt ($7.5 billion more) with debt-equity ratio of 2.5x compared with 2.07x a year earlier.

In the past three years, Dominion allocated $17 billion in capital expenditures, raised $11.6 billion in debt (net repayments), raised another $3.6 billion in share issuances, and accumulated a negative or a free cash outflow of -$4.96 billion.

Meanwhile, 18 analysts have an average OVERWEIGHT recommendation on Dominion Energy with a price target of $80.36 vs. $78.96 at the time of writing.

Brought by poor free cash flow generation in recent years, Dominion Energy is a pass.

Disclosure: I do not have shares in Dominion Energy.

Why Filipinos Should Consider Selling PLDT, MERALCO, and Metro Pacific.

Former Philippine Ambassador to Greece and Cyprus, Roberto Tiglao, wrote a book for Filipinos to study and understand

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(President Rodrigo Roa Duterte and Roberto Tiglao, Image Source)

Published on January 19, 2017, Roberto Tiglao’s well in-depth eye-opening book, Colossal Deception, is now available on Amazon.com.

The well-respected writer provided years of his extensive research discussing the history and occurrences that resulted in the now illegal foreign ownership of the Philippines’ largest public utility companies: 360 billion Php telecommunications company-PLDT (TEL); 321 billion Php electricity distributor-MERALCO (MER); 217 billion Php diversified company-Metro Pacific Investments (MPI), among other companies by an Indonesian billionaire and former Suharto crony Anthoni Salim.

Thinking of all the relevant risks that could ensue when the politically-willed and nothing but the truth, strong man Philippine President Rodrigo Roa Duterte finally takes action against this treachery aided by no other than Manuel V. Pangilinan (Philippines’ 50th richest), I thought hard and began selling my shares a few days later.

Treachery may be a softer word, but any action willfully performed to violate the Philippine Constitution to enrich one man and his few selected goons pockets is and should certainly be punishable by law.

Brought by this realization and countless risks, I no longer see myself supporting these kinds of companies, and have sold all my MER and TEL shares effective 10/18/2017. I am also considering selling my recently purchased Pepsi Philippines (PIP) shares because of its foreign ownership structure along with my investments in Globe (GLO).

The Duterte administration a.k.a. the Philippine government must begin investigating no other than the country’s Securities and Exchange Commission that is led by chairwoman Teresita J. Herbosa for possible collusion that allowed dummy corporation/s (especially PLDT) skirt the Constitution back in 2013 followed by the chief executives of these ill-serving corporations.

After sinking the government’s teeth and tearing the rich and corrupt apart, such that of Mighty King’s 45 billion Php settlement, Roberto Ongpin’s 2 billion Php exit from Philweb (WEB)Lucio Tan’s 10-day deadline response to a 6 billion Php settlement (PAL) among others, no one or group of big fishes are certainly above the law in the country.

To sum it up, NATIONALIZATION would be one of the critical words that could send share prices of these foreign-controlled utility companies spiraling down.

I personally do not see how the administration sees it fit to strike hard with the Philippine Stock Index at all-time highs, but one thing is for sure, the government already knows about these committed shenanigans.

One must remember that “Bulls Make Money, Bears Make Money, Pigs Get Slaughtered.” 

*An earlier unedited post indicated I sold my shares effective 10/18/2019. 2019 was updated to 2017.

Take Some Profits: PTT PCL (Thailand)

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Thailand oil and gas company has provided handsome returns in the past year

Stock: PTT PCL (PTT:TB) 

PTT, a ฿1.2 trillion (Thai baht; $35.91 billion USD) Thailand oil & gas integrated company, has an attractive 4.3% dividend yield with 18% payout ratio.

PTT is 51%-owned Thailand Finance Ministry.

In PTT’s recent six months of operations that ended in June, PTT reported an impressive 22% revenue increase compared to its year prior operations to ฿988.6 billion and 58% rise in profits to ฿76.7 billion.

PTT recorded much higher other income (+฿12.7 billion year over year) and gains in foreign exchange (+฿5.72 billion) leading to much better overall profitability for the company.

As of June, PTT had ฿214.5 billion in cash and cash equivalents (+฿15.7 billion higher than a year earlier), and ฿583 billion in debt (-฿1.22 trillion lower than a year ago) having led to a debt-equity ratio of 0.73x vs. 0.87x a year earlier.

Overall equity also increased by ฿65.4 billion to ฿795.4 billion.

In the past three years, PTT allocated ฿400 billion in capital expenditures, raised ฿40.6 billion in share issuances, reduced overall debt (net issuances) by ฿230.3 billion, and provided ฿137.6 billion in dividends and repurchases representing 34% of its ฿400 billion in free cash flow.

Applying a conservative flat revenue growth multiplied with its recent PS multiple averages indicated a per share figure of ฿240.73 vs. ฿420 at the time of writing.

Having returned 27.32% this past year, investors should probably consider reducing their exposure to PTT (if any). Despite an attractive yield and low payout ratio, the company’s shares are a pass right now.

Disclosure: I do not have shares of any of the companies mentioned.

Assessing Webster Financial’s Recent Operations

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Riding Webster Financial’s preferred shares may serve too late

Stock: Webster Financial Corporation(NYSE:WBS)

Webster Financial Corporation, a $4.9 billion Connecticut-based bank holding company and financial holding company, has a 22x P/E ratio (vs. industry 19x) and a dividend yield of 1.9% (vs. industry 1.8%).

Although lacking any appealing even just at par with the Vanguard S&P 500 ETF’s (ticker VOO) 1.94%, Webster’s preferred E-shares (ticker WBS-E) has an attractive 6.4% albeit non-cumulative at a liquidation value of $25 per piece vs. $25.22 a share at the time of writing.

With one payout, December 15, 2017, remaining on the preferred’s clause before possible be repurchased back by Webster by year-end, a mere 0.40 cents or 1.6% yield per preferred share may not be a prudent investment when accompanied by a -0.87% return upon liquidation netting a possible 0.72% return.

Nonetheless, Webster delivered 10% increase in its interest income (3year average: 7.66%) to $446.5 million and 25.2% profit rise (3year average: 4.88%) to $116.8 million in its recent first half of operations.

James C. Smith, chairman and chief executive officer

“Webster again reported solid business and financial performance, with record levels of net interest income and pre-provision net revenue resulting in record net income and earnings per share growth of over 20 percent from a year ago.

“Our investments in strategic growth initiatives are producing positive results for shareholders as Webster bankers excel in service to our customers and communities.”

Company metrics (some; 3)

1 Net interest margin (NIM)

In the first half, Webster registered 3.25% in its NIM vs. 3.10% a year earlier.

2 CET1 risk-based capital

10.84% as of June compared to 10.50% compared to the same period last year.

3 Return on average tangible common shareholders’ equity (annualized basis) (non-GAAP)

Figures were 12.56% vs. 10.94% last year.

Meanwhile, Webster’s cash also increased by $6.84 million year over year to $231.8 million as of June.

In the past three years, Webster allocated $107 million in capital expenditures, raised $801 million in long-term debt (net repayments and other financing activities), allocated $303 million in repurchases and dividends have represented about 35% of the bank’s free cash flow.

Analysts have an average hold recommendation with a $52.80 target price vs. $53.01 at the time of writing. Having traded twice its book value vs. 3-year average of 1.7x and par dividend yield compared to the broader market, Webster common and preferreds are a pass.

DisclosureI do not have shares of any of the companies mentioned.

Tempted Juicy Dividend Yields: Huaneng Power International

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Significant payouts accompanied by other unappealing findings make Huaneng a pass

Stock: Huaneng Power International Inc (ADR)(NYSE:HNP) 

Huaneng Power International, $13.9 billion Beijing-based and one of the China’s largest independent power producers, has a very appealing 6.8% dividend yield with a 118% payout ratio in the recent 12 months.

The 23-year-old power producer recently reported its first half operations that ended in June whereby it delivered a 34% (vs. 3-year ave. -5.34%) revenue increase year over year to ¥70.8 billion (Chinese Yuan) and a contrasting 96% drop (vs. 3-year ave. -6.51%) in profits to ¥244 million compared to its year-earlier period.

Huaneng recorded 29.4% higher in operating expenses resulting in lower profits. In particular, the company had 90% higher fuel expenses or ¥20.84 billion more in the recent period compared to one year earlier.

Looking at its balance sheet, Huaneng had ¥12.2 billion in cash and cash equivalents, and ¥241.5 billion in debt (¥77.3 billion higher vs. last year) with debt-equity ratio 3 times (vs. 1.95 times a year earlier). Overall equity also declined by ¥2 billion to ¥82.2 billion.

In the recent half, Huaneng’s free cash flow declined to ¥1.08 billion compared to ¥12.1 billion a year earlier brought by lower profits in the period.

In the past three years, Huaneng allocated ¥64.9 billion in capital expenditures, reduced its debt by ¥27.7 billion (net issuances and other financing activities), raised ¥7.1 billion in share issuances, and provided ¥18.08 billion in dividends representing 42.8% of its free cash flow ¥42.3 billion.

Analysts have an average hold recommendation with $27.75 target price vs. $24.81 at the time of writing. Meanwhile, declining revenue, higher expenses, and leveraged balance sheet makes Huaneng a pass.

Disclosure: I do not have shares in any of the companies mentioned.

Strong Investment Performance Guarantees AGNC’s Dividends

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Conservative investors may take a pass

Stock: AGNC Investment Corp (NASDAQ:AGNC) 

AGNC Investment Corporation, a $7.8 billion Maryland-based REIT, demonstrates an attractive 10% dividend yield and a 47% payout ratio in the past four quarters.

Other than this attractive payout, the nine-year-old REIT also had $1.12 billion in cash and cash equivalents as of June, and has a book value of $7.75 billion (0.6% higher vs. last year), and has reduced its debt by $3.16 billion compared to its year-ago period.

In review, AGNC responsible reduced its debt remarkably brought by its $3 billion payment to its Federal Home Loan Bank Advances that matured on February leaving the company in much better balance sheet situation at a debt-equity ratio of 0.05 times vs. 0.46 a year earlier.

Meanwhile, AGNC recorded 8.2% net interest income year over year as its recent six months period ended in June, while profits rose to $86 million compared to $921 million in losses a year earlier.

In review, AGNC experienced a remarkable $1.36 billion losses a year earlier brought by its derivative and hedging investments concerning interest rate swaps.

Here is why AGNC use such derivatives (page 30; Q2 2016 filing):

“We use interest rate swaps and other hedges to attempt to protect our net book value against moves in interest rates, we may not hedge certain interest rate, prepayment or extension risks if we believe that bearing such risks enhances our return relative to our risk/return profile, or the hedging transaction would negatively impact our REIT status.

The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levels of earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller changes in interest rates. There can also be no certainty that our projections of our exposures to interest rates, prepayments, extension or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially.”

Company metrics (2)

1 Tangible net book value

As of June, AGNC had a tangible net book value of $19.25 per common shares—$0.06 lower than in March.

2 Economic return on tangible common equity

Economic return (loss) on common equity represents the change in tangible net book value per common share and dividends declared on common stock during the period over the beginning tangible net book value per common share.

The return as of June was 2.5% compared to 3.3% a year earlier.

AGNC Investment Corporation 

According to filings, AGNC earns income primarily from investing in Agency residential mortgage-backed securities on a leveraged basis.

These investments consists of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively referred to as “GSEs”).

Further, AGNC may also invest in other types of mortgage and mortgage-related residential and commercial mortgage-backed securities where repayment of principal and interest is not guaranteed by a GSE or U.S. Government agency.

Cash flow

In the first half, AGNC’s cash flow from operations declined by 1.3% year over year to $679 million. The company also generated $958 million in Agency mortgage-backed securities (net investment purchases).

The company also allocated $1.35 billion in debt repayments (net issuances and other financing activities), and $679 million representing 55.5% of its cash flow in dividends.

The cash flow summary

In the past three years, the company generated proceeds of $21.4 billion in investment activities (net purchases), reduced debt by $23.1 billion, generated $4.4 billion in free cash flow, and provided $3.27 billion in dividends.

Conclusion

AGNC’s dividend payouts have not been strongly supported by its net income alone in recent years, but REIT’s ability to generate billions of cash flow from its investments have amply did so.

Meanwhile, the REIT’s more than a billion dollar losses in its derivatives a year ago is not the first time it recorded such losses. Back in fiscal year 2012 and 2014, AGNC recorded $1.35 billion and $1.24 billion losses related to derivative instruments.

The company admits that it cannot foresee these hedges to do well in certainty as completely described earlier, but this should be kept in mind by those attracted to the company’s amazingly bountiful dividends.

Analysts have a hold recommendation and a target price of $20.09 a share vs. $21.59 at the time of writing. Applying three-year price-book average and a 15% margin to AGNC’s current book value indicated a per share figure of $14.51.

In summary, AGNC is a pass.

Quotes

Gary Kain, the Company’s Chief Executive Officer, President and Chief Investment Officer

“We are pleased to report another quarter of solid financial performance for AGNC.”

“Our earnings profile continues to be supportive of our dividend despite an elevated hedge ratio and a reduction in our aggregate interest rate risk position. As we enter the third quarter, returns on levered Agency MBS remain attractive as current valuations reflect the anticipated near-term reduction in MBS purchases by the Federal Reserve. The overhang of possible Federal Reserve tapering has driven wider spreads on Agency MBS over the last year. In stark contrast, the spreads on most credit-centric fixed income investments have tightened to multiyear lows. At the same time, the funding picture for Agency MBS, including rate level and capacity, continues to be very attractive. As such, Agency MBS provide levered investors like AGNC with favorable return potential on an absolute basis and relative to alternatives in the fixed-income and equity markets.”

Peter Federico, the Company’s Executive Vice President and Chief Financial Officer

“For the quarter, AGNC generated an economic return of 2.5% on tangible common equity.”

“In addition to our strong financial results, we continued to expand our use of our captive broker-dealer, Bethesda Securities (‘BES’), as the size of our repo position funded through BES grew to almost $10 billion and we began clearing trades for our TBA securities position. Finally, we increased our hedge portfolio during the second quarter, thus providing us with greater protection against net asset value fluctuations due to interest rate changes. All in all, we believe these actions position AGNC for success across a broad spectrum of market conditions.”

Disclosure: I do not have shares in any of the companies mentioned.

Juicy Yields By a Mortgage REIT: Invesco Mortgage Capital

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An attractive dividend provider is a hold at the moment

Stock: Invesco Mortgage Capital (ticker IVR) 

The Maryland-incorporated REIT focused on residential and commercial mortgage-backed securities and mortgage loans recently declared a 2.5% increase in its dividend. Initially, this could be just easily taken for granted, but at 9.4% dividend yield, 0.9 PB ratio, and a mouth-watering 3.7 PE ratio should appeal to even the most conservative investors.

These valuations were not always these consistent and historical annual losses have indicated that the current attractive valuations may not hold or maybe even irrelevant. So it could be more rational to simply assess Invesco’s balance sheet.

As of June, Invesco had $64 million in cash and cash equivalents, and $2.05 billion in long-term debt with debt-equity ratio 0.8 times compared to 0.93 times a year earlier. Overall long-term debt rose $178 million while equity shrunk by $130 million to $2.2 billion.

In addition, Invesco carries no goodwill nor intangibles in its assets but $16.08 billion (96.5%) of its assets in mortgage-backed and credit risk transfer securities. These assets vary in figure in recent years as it had shown a decline of 4.7% in total in the past three years.

Invesco Mortgage Capital

According to filings, Invesco Mortgage Capital is externally managed and advised by Invesco Advisers, Inc., its Manager, a registered investment adviser and an indirect, wholly-owned subsidiary of Invesco Ltd., a leading independent global investment management firm.

Further, Invesco Mortgage’s objective is to provide attractive risk-adjusted returns to its investors, primarily through dividends and secondarily through capital appreciation. Its objective, the company primarily invests in the following:

Agency RMBS (41% of Invesco Mortgage equity)

-Residential mortgage-backed securities that are guaranteed by a U.S. government agency such as the Government National Mortgage Association or a federally chartered corporation such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (Agency RMBS).

Commercial Credit (2; 33% of equity)

-RMBS that are not guaranteed by a U.S. government agency (non-Agency RMBS).

-Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises (GSE CRT).

Residential Credit (3; 26% of equity)

-Commercial mortgage-backed securities (CMBS).

-Residential and commercial mortgage loans

-Other real estate-related financing arrangements.

What is more attractive is that Invesco Mortgage has elected to be taxed as a real estate investment trust (REIT) for U.S. federal income tax purposes under the provisions of the Internal Revenue Code of 1986. To maintain its REIT qualification, the company is generally required to distribute at least 90% of its REIT taxable income to its stockholders annually.

As per filings, the company conducts its business through an IAS Operating Partnership LP (the Operating Partnership), as its sole general partner.

As of June 30, 2017, the REIT owned 98.7% of the Operating Partnership, and a wholly-owned subsidiary of Invesco owned the remaining 1.3%. Invesco Mortgage also has one operating segment.

Invesco Mortgage’s operating results can be affected by a number of factors and primarily depend on the level of our net interest income and the market value of its assets.

Net interest income

The company’s net interest income, which includes the amortization of purchase premiums and accretion of purchase discounts, varies primarily as a result of changes in market interest rates and prepayment speeds, as measured by the constant prepayment rate (CPR) on the company’s target assets. Interest rates and prepayment speeds vary according to the type of investment, conditions in the financial markets, competition and other factors, none of which can be predicted with any certainty.

Meanwhile, the market value of Invesco Mortgage’s assets can be impacted by credit spread premiums (yield advantage over U.S. Treasury notes) and the supply of, and demand for, target assets in which the company invests.

In the first half, Invesco Mortgage’s net interest income rose 8.3% year over year to $169.2 million brought mostly by an 8% decline in interest expenses and a 2.3% rise in interest income. Net interest margin, meanwhile, was at 1.94% compared to 1.85% a year earlier.

Book value

Invesco Mortgage calculates its book value by deducting preferred shares in its equity divided by all diluted shares outstanding. The company’s book value per share as of June grew 4.5% year over year to $18.27 a share.

Cash flow

In the first half, Invesco Mortgage’s cash flow from operations declined by 4.6% to $154.4 million. In addition, dividends and distributions represented 66% of its cash flow from operations.

The REIT does not have capital expenditures but has allocated net $895.5 million in the urchase of mortgage-backed and credit risk transfer securities for the period and raised $63.2 million in repurchase agreement proceeds.

Repurchase agreements are short- and long-term borrowings made by Invesco Mortgage to finance its investments. Under repurchase agreement financing arrangements, certain buyers require the borrower to provide additional cash collateral in the event the market value of the asset declines to maintain the ratio of value of the collateral to the amount of borrowing.

Conclusion

Invesco Mortgage’s recent half operations, including the company’s net interest income and book value performance, strongly indicated a healthy appreciation of profitability for the company.

It is important to highlight though that the REIT has experienced a slow decline in its overall net interest income in recent years, but interest expenses has shrunk faster therefore leading to a supportive net interest income figures.

Average analysts have an overweight recommendation on Invesco Mortgage with a target price $17.58 a share vs. $17.12 at the time of writing.

In summary, Invesco Mortgage is a hold with $17.5 target.

Quotes

 John Anzalone, Chief Executive Officer (second quarter results)

“Our portfolio was well positioned to benefit from market conditions during the second quarter.”

“Our diversified sector allocation and security selection led to favorable economic return performance and continued book value stability. We have maintained a steady dividend of $0.40 per common share for the last eight quarters. Our consistent approach and execution has generated core earnings covering our dividend in seven of those eight quarters.”

DisclosureI do not have shares in any of the companies mentioned.