Consider Steel Partners Holdings’ Preferred Shares

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Company placed reasonable clause surrounding dividend payouts

Stock: Steel Partners Holdings LP(NYSE:SPLP) 

Steel Partners Holdings LP, a $480 million New York-based private investment firm, currently traded at 20% discount its book value (about same as its 3-year average). The firm does not pay a dividend on its common shares but has an attractive fixed 6% dividend yield on its preferred units (ticker SPLP-A).

In its recent six months operations, Steel Partners’ revenue increased 28.7% (vs. 3-year ave. 13.1%) year over year to $681.7 million and a contrasting 36.4% decline (vs. 3-year ave. -30.2%)  in profits to $7.2 million.

The investment firm recorded 31% higher costs and expenses resulting in lower profitability in the period.

Warren Lichtenstein, Executive Chairman of Steel Partners

“Operating results for the second quarter reflected solid performances by our Diversified Industrial and Energy segments, including contributions from acquired operations, along with reduced corporate expense, partially offset by lower contributions from our Financial Services segment.

“While expectations for the quarter and first half of 2017 were achieved, the high end of the Adjusted EBITDA guidance range for the remainder of the year has been adjusted downward to reflect the outlook in our Diversified Industrial segment, including weaker than anticipated demand, a shift in product mix, and expected higher material costs, partially offset by an improved outlook in our Financial Services and Energy segments.”

Steel Partners is managed by an entity called SP General Services LLC (SPGSL) in which five of SPGSL board members are appointed by no other than Warren G. Lichtenstein, Steel Partners’ executive chairman and owns 14.4% stake in the company itself. SPGSL, on the other hand, owns 28.4% of Steel Partners whereby the 51-year-old Lichtenstein also serves as the chief executive.

In addition to annual expenses of SPGSL answered for by Steel Partners, the company pays an annual rate of 1.5% of its capital to SPGSL and was at $8.6 million in the recent fiscal year.

Founded in 1990, Steel Partners owns and operates businesses and has significant interests in companies in various industries, including diversified industrial products, energy, defense, supply chain management and logistics, banking and youth sports.

The company operates through the following segments: Diversified Industrial (86% of 1H unadjusted revenue), Energy (9%), Financial Services (5%), and Corporate and Other.

Steel Partners have several direct/indirect ownerships of companies including Handy & Harman (which will be totally acquired through a merger agreement as of June 26), API Group plc, Steel Excel, and Utah-based WebBank.

For some reason, Steel Partners’ energy business has failed to generate any profits in recent years, including the first half of its operations. The company’s stake in WebBank has help it generated good business in recent years as the bank itself had a healthy Tier 1 Capital ratio of 29.7% as of June compared to 33.3% in December 2016.

As of June, Steel Partners had $338 million in cash and cash equivalents, and $390 million in debt (+$14 million from a year earlier) with debt-equity ratio 0.65 times (vs. 0.65 times a year earlier). Overall capital also increased by $16.5 million to $595.7 million.

In the past three years, the company allocated $86 million in capital expenditures, raised $353 million in debt and other financing activities (net repayments), handed out $202 million in share repurchases despite a free cash flow generation of $171 million in the period.

With a good amount ownership interest and focus on building its diversified industrial business (86% of unadjusted revenue), Steel Partners’ preferred shares seem to be a good pick. The company, nonetheless, should probably eliminate its declining energy business as it only encroaches on its capacity to deliver profitability.

Using recent historical revenue growth and multiples and a 15% margin indicated a per share figure of $21.51 vs. $18.45 at the time of writing.

Dividend investors, meanwhile, might want to take some risk on Steel Partners’ preferreds that currently traded at $21.05 compared to a potential redemption of $25, plus yearly dividends. A caveat, reviewing its clauses triggered some interesting findings that actual liquidation value could be less than $25 depending on the company’s capability on allocating cash to such.

SEC Filings Snippets (link to file)

Distributions

Distributions on the SPLP preferred units will be payable when, as and if declared by the SPLP GP Board out of funds legally available, at a rate per annum equal to 6.0% of the $25.00 liquidation preference per unit. Distributions are payable in cash or in kind or a combination thereof at the sole discretion of the SPLP GP Board. The liquidation preference per unit for purposes of calculating distributions will not be adjusted for any changes to the capital account balance per unit as described below under “— Amount Payable in Liquidation.”

Amount Payable in Liquidation

Upon any voluntary or involuntary liquidation, dissolution or winding up of our partnership (“liquidation”), each holder of the SPLP preferred units will be entitled to a payment out of our assets available for distribution to the holders of the SPLP preferred units following the satisfaction of all claims ranking senior to the SPLP preferred units. Such payment will equal the sum of the $25.00 liquidation preference per SPLP preferred unit and accumulated and unpaid distributions, if any, to, but excluding, the date of liquidation (the “preferred unit liquidation value”), to the extent that we have sufficient gross income (excluding any gross income attributable to the sale or exchange of capital assets) in the year of liquidation and in the prior years in which the SPLP preferred units have been outstanding to ensure that each holder of SPLP preferred units will have a capital account balance equal to the preferred unit liquidation value.

The capital account balance for each SPLP preferred unit will equal $25.00 initially and will be increased each year by an allocation of gross ordinary income recognized by us (including any gross ordinary income recognized in the year of liquidation) that is allocated to the SPLP preferred units, as described above in “Material U.S Federal Income Tax Consequences.” We refer to our gross income (excluding any gross income attributable to the sale or exchange of capital assets) as our “gross ordinary income.” The allocations of gross ordinary income to the capital account balances for the SPLP preferred units in any year will not exceed the sum of the amount of distributions paid on the SPLP preferred units during such year and, to the extent the amount of our distributions in prior years exceeded the cumulative gross ordinary income allocated to the capital account balances for the SPLP preferred units in those years, the amount of such excess for all prior years. If the SPLP GP Board declares a distribution on the SPLP preferred units, the amount of the distribution paid on each such SPLP preferred unit will be deducted from the capital account balance for such SPLP preferred unit, whether or not such capital account balance received an allocation of gross ordinary income in respect of such distribution. The allocation of gross ordinary income to the capital account balances for the SPLP preferred units is intended to entitle the holders of the SPLP preferred units to a preference over the holders of outstanding common units upon our liquidation, to the extent required to permit each holder of a SPLP preferred unit to receive the preferred unit liquidation value in respect of such unit. If, however, we were to have insufficient gross ordinary income to achieve this result, holders of SPLP preferred units would be entitled, upon liquidation, to less than the preferred unit liquidation value and may receive less than $25.00 per SPLP preferred unit. See “Risk Factors — If the amount of distributions on the SPLP preferred units is greater than our gross ordinary income, then the amount that a holder of SPLP preferred units would receive upon liquidation may be less than the preferred unit liquidation value.”

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

Investors Are Pissed: Dixons Carphone PLC

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Dividend payouts have not compensated well enough for shareholders of the past year

Stock: DIXONS CARPHONE ORD GBP0.001(OTCMKTS:DSITF) 

Dixons Carphone PLC, a $2.9 billion multinational electrical and telecommunications retailer and services company headquartered in London, United Kingdom, recently traded at a good 30% discount to its book value while having had an attractive 6% dividend yield at a 39% payout ratio.

In its recent 12 months of operations that ended in April, the three-year-old company reported 8.7% revenue growth to £10.6 billion (vs. 3-year average 441%) and profit growth of 83.2% to £295 million (vs. 3-year average 183.2%).

All of Dixons’ segments demonstrated revenue in its recent year. Its UK & Ireland (62% of total unadjusted sales) delivered 2.6% revenue growth, while its business in the Nordics, Southern Europe, and Connected World Services experienced 20% to 40% year over year revenue growth.

Connected World Services, which is 2% of total unadjusted sales, registered an outstanding 40% revenue growth in the past 12 months and an EBIT margin of 9.9% (most profitable) compared to 7.2% a year earlier period.

As of April, Dixon had £147 million in cash and £480 million in debt with debt-equity ratio of 0.16 times (vs. 0.17 times a year earlier). Overall debt declined by £20 million while equity rose £195 million to £3.06 billion.

In the past couple of years, Dixon allocated £463 million in capital expenditures, generated £295 million in free cash flow, reduced its debt by £51 million, and provided £226 million in dividends and share repurchases at an average payout ratio of 79%.

Analysts have an overweight recommendation with a target price of £250.24 vs. £193.40 at the time of writing. Asking 25% margin from Dixon’s book value indicated a per share figure of £224.24 a share.

Meanwhile, Dixons’ shares that trade in the over-the-counter market, would indicate a per share figure of $3 vs. $2.48 at the time of writing.

For sure, this would indicate that Dixon is at good value right now, but sifting through recent events regarding the company. Several shareholders are already wary that the company had cut its profit outlook this fiscal year along with its share price decline in recent years.

In summary, Dixons is a hold at this time.

About Dixons Carphone PLC

According to filings, Dixons’ core retail focus is the sale of consumer electricals and mobile phone products and connectivity.

The company also has a significant services infrastructure focused on maintenance, support, repairs, delivery and installation of hardware and services. In addition, Dixons has developed a business-to-business operation via its Connected World Services division which leverages the specialist skills, operating processes and technology of the business to provide services to third parties.

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

European Dividend Provider: Klépierre

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Steady business performance ensures dividend security despite generous payouts

Stock: KLEPIERRE EUR1.40(OTCMKTS:KLPEF

 

Klépierre, an $11.8 billion leading shopping center specialist in Europe, exhibited an attractive 5.2% dividend yield with 48% payout ratio.

The 27-year-old Paris-based company with property portfolio made up of 156 shopping centers in 16 countries of Continental Europe recently reported its first half operations.

In the recent six months, Klépierre reported 1.3% (vs. 3 year ave. 6.4%) higher gross rental income to € 611.7 million and a 3.8% (vs. 3 year ave. 181.2%) rise in profits to €570 million—representing a very profitable margin of 93.2%.(vs. 3 year ave 44.5%).

Klépierre records significant profits brought by its income in ‘change in its value of investment properties,’ which was at €400.5 million in the first half compared to €398.4 million a year earlier.

In review, Klépierre experienced steady growth in all of its businesses in the Europe region except for its business in Scandinavia and Germany, ~20.7% of total unadjusted gross income.

The property specialist also recorded a cash position of €461 million and €9.67 billion in debt with debt-equity ratio of 0.98 times (vs. 1.85 times a year earlier). In the period, overall debt fell by €194 million while equity rose €4.52 billion to €9.86 billion.

Klépierre’s cash flow from operations in the first half rose 4.5% year over year to €531 million, capital expenditures were €140 million leaving the company with €391 million in free cash flow (vs. €358 million a year earlier). Dividend payouts represented 143.7% of free cash flow (vs. 71.7% in the past three years).

Klépierre also was a net debt payer in the past three years having reduced overall debt (plus other financing activities) by €2.65 billion. Accumulatively, it also generated €1.7 billion in free cash flow and provided €1.23 billion in dividend payouts.

Meanwhile, analysts have observed that Klépierre has fallen 21% in the past year, and fear that Amazon (ticker AMZN) would further impact overseas sentiment and operations of traditional retailers.

Analysts also have an overweight recommendation on Klépierre with a target price of $41.72 a share vs. $38.35 at the time of writing. Applying past P/S multiple average, 15% margin, and average revenue estimates for this fiscal year indicated a per share figure that would be 11.7% lower than today’s share price.

In summary, Klépierre is a hold right now and trading at its value.

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

Time to Take Some Profits off the Table: ABN AMRO Group NV

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Dutch Bank has performed very well so far this year

Stock: ABN AMRO Group NV(AMS:ABN)

ABN AMRO Group N.V. is a €10.4 billion Dutch bank group, consisting of ABN AMRO Netherlands, ABN AMRO Private Banking, the International Diamond and Jewelry Group, and Fortis Bank Netherlands (Wiki) .

AMRO has an attractive 4.3% dividend yield with 49.4% payout ratio along with 9.7x P/E ratio.

In its recent six months of operations, AMRO reported 24% operating income to €4.74 billion and an impressive 83% profit growth to €1.54 billion.

In review, AMRO’s main revenue generator—retail banking (43% of unadjusted operating income—actually experienced a 3.5% decline in operating income, but has remained profitable. Meanwhile, the bank’s corporate & institutional banking business rose 159% while having recorded profit margins of 17.5% compared to losses a year earlier brought by “a larger number of professional clients are being charged negative interest rates on deposits.”

As of June, the bank had €26.6 billion in cash and balances and €384 billion in total liabilities with liabilities-to-equity ratio of 19.4 times compared to 22.3 times a year earlier. Overall liabilities fell by €17 billion while equity increased €1.9 billion.

In the past three years (excluding the recent half), AMRO allocated €1.14 billion in capital expenditures, reduced its debt by €10 billion, raised €994 million in common stock issuance, generated €32.8 billion, and provided €1.74 billion in dividends.

Analysts have an overweight recommendation with target price of €26.89 a share vs. €25.34 at the time of writing.

Having returned 25.56% so far this year, AMRO shareholders should probably cash in some profits in the Dutch Bank and wait for a 20%-30% price drop before accumulating again.

In summary, AMRO is a pass.

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

An Attractive Dividend Provider: Costamare

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Recent poor performance may deter conservative investors

Stock: Costamare Inc(NYSE:CMRE) 

Costamare, a $660.6 million Monaco-based owner and provider of containerships for charter, recently traded 40% discount its book value at $6.18 a share (book value of $12.80 as of June).

The company also had an attractive 6.5% dividend yield with an 111% payout ratio in the recent twelve months.

In its recent six months of operations that ended in June, Costamare reported 12% (vs. 3-year average 4.16%) revenue decline to $210.5 million and 42% drop (3-year average -7.5%) in profits to $35.6 million.

In addition to the lower revenue and expenses, Costamare reported $6.4 million in losses in relation to losses in sales of vessels resulting in lower profits.

Going back to Costamare’s balance sheet, the vessel lender had $164.9 million in cash and cash equivalents and $1.05 billion in debt ($119.2 million more than a year earlier) with debt-equity ratio 0.98 times (vs. 0.78 times a year earlier). Equity also declined by $127.2 million leading to book value of $1.07 billion.

Here is Costamare’s CFO on its second-quarter performance

Mr. Gregory Zikos, Chief Financial Officer of Costamare Inc.

“During the second quarter the Company delivered solid results. We recently accepted delivery of three second hand vessels, which have been chartered for periods ranging from 5 to 7 years. During the quarter we entered into debt financing agreements for two of them and we are into discussions regarding the debt finance of the third ship. As of today all of our new building program is fully funded with remaining equity commitments amounting to only US $ 2 million, due in 2018.

On the chartering side, we have no ships laid up. We continue to charter our vessels, having chartered in total 6 ships since the last quarter.

Finally, on the dividend and the Dividend Reinvestment Plan currently in place, members of the founding family, as has been the case since the inception of the plan, have decided to reinvest in full the second quarter cash dividends.

As mentioned in the past, our goal is to strengthen the Company and enhance long term shareholder value. In that respect, we are actively looking at new transactions selectively.”

Cash flow

In the past three years (excluding recent first half), Costamare allocated $94 million in capital expenditures, reduced its debt by $175 million, generated $621 million in free cash flow, and provided $270 million in dividends at an average free cash flow payout ratio of 45%.

Conclusion

With lower business performance in the recent half, Costamare also carried a little more leveraged balance sheet. Nonetheless, the company appeared to have well-covered dividend payouts in terms of its free cash flow generation.

Analysts have an average overweight recommendation with a target price of $8 vs. $6.18 at the time of writing. Applying 30% to its book value indicated a per share figure of $8.96.

In summary, Costamare is a potential buy with $8 per share target price.

About Costamare

(Recent quarter press release; Seeking Alpha) Costamare Inc. is one of the world’s leading owners and providers of containerships for charter. The Company has 43 years of history in the international shipping industry and a fleet of 72 containerships, with a total capacity of approximately 473,000 TEU, including two newbuild containerships to be delivered. Eighteen of our containerships, including two newbuilds on order, have been acquired pursuant to the Framework Deed with York Capital Management by vessel-owning joint venture entities in which we hold a minority equity interest.

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

Attractive Dividend Yield: AllianceBernstein Holding

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Investors appreciate the company’s payouts

Stock: AllianceBernstein Holding LP (NYSE:AB)

AllianceBernstein Holding LP currently has a very juicy 8.5% dividend yield with trailing 97% payout ratio, and 11.3 times price-earnings ratio.

The $2.3 billion New York-based asset manager appears to have very generous dividend amount compared to the broader S&P 500 index’s 1.89% and 10-year Treasury rate of 2.254%.

According to filings, AllianceBernstein provides research, diversified investment management, and related services globally to a broad range of clients through its three buy-side distribution channels: Institutions, Retail and Private Wealth Management, and its sell-side business, Bernstein Research Services.

The asset manager’s principal source of income and cash flow is attributable to its investment in AB limited partnership interests. AllianceBernstein has 34.8% interest in this partnership as of June 2017.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Quarterly performance

Interesting fact about the asset manager is that it records only its equity in net income attributable to AB Unitholders. In the recent six months, its income fell 6.9% lower to $97.6 million and a contrasting 7.1% rise in profits to $11.96 million in profits brought by lower taxes.

AllianceBernstein also grew its assets under management by 5.5% year over year to $516.6 billion.

Profits

In the past three years, AllianceBernstein registered revenue growth average of 9.4%.

Balance sheet

AllianceBernstein’s total liabilities fell $72 million while total capital decreased by $99.4 million.

Cash flow

Despite lower profits in the period, AllianceBernstein’s cash flow from operations increased by 23% year over year to $108.8 million brought by higher cash distributions received from its partnership interest.

In recent years, AllianceBernstein has provided most all of its cash flow in dividends.

Conclusion

AllianceBernstein appears to be a well-seasoned asset manager having traced its origins back in 1967. The company has exhibited reliable dividend payouts in the past decade, and the increasing assets under management may further support this trend. Up 11.4% this year compared to the broader S&P500’s 13.43 gains exhibits the near comparison performance of AllianceBernstein plus the hefty dividends.

Meanwhile, one can have a hard time deriving share price using dividend growth and payouts given the company’s varying payouts.

Despite its current juicy dividend yields, AllianceBernstein would further be a very attractive buy given any 5-10% pullback vs. its current share price of $24.5.

Quotes

Seth P. Bernstein, President and CEO of AB (second quarter)

“It’s clear that I’ve joined AB at an exciting point in the firm’s long-term strategic and competitive transition.”

“AB’s momentum accelerated in the second quarter, with 11% year-on-year gross sales growth, active net inflows of $6.6 billion that were positive across all three client channels, 270 points of adjusted operating margin expansion and 26% growth in adjusted earnings per unit.”

“AB’s strategy to maintain a laser focus on investment performance, broaden our global presence, consistently deliver relevant services to our clients and remain vigilant in improving our financial position is the right one, and after years of relentless execution, our steady progress is coming through in the results. Investment performance remains stellar across the fixed income franchise and equity track records keep trending upward. In Retail, gross sales remained at record levels during the quarter, driven by strength in our preeminent Asia ex Japan fixed income franchise, where first half gross sales increased 65% year-on-year and net flows totaled more than $4 billion. In Institutional, we were pleased to see a recovery in activity levels from the first quarter. Gross sales rose 60% sequentially and inflows of $1.2 billion returned to positive territory. We’re particularly encouraged by the positive trend in our pipeline fee rate. We’re winning more mandates in higher fee areas like commercial real estate debt and concentrated active equities – demonstrating the success we’ve had in diversifying our product set. As a long-time personal client, I knew the Bernstein Private Wealth business well coming in, but I didn’t fully appreciate how effective we’ve been in recent years in appealing to larger and more sophisticated clients with our offering. The suite of targeted services, which has $5.5 billion in commitments today, has been instrumental in this effort. On the sell side, I was well aware coming in of Bernstein’s reputation for differentiated institutional research. Now I see how well this business is navigating shrinking trading volumes and fee compression in the US and the MiFID II rollout in Europe, while expanding our research and trading presence in faster-growing international markets. Finally, AB has done impressive work to improve our financials, in particular continuing a five-year trend of margin expansion so far in 2017. The second quarter adjusted margin of 25% was up 270 bps year-on-year, and adjusted earnings per unit of $0.49 were up 26%.”

“Spending time with my new colleagues here has confirmed what I knew coming in: AB is full of brilliant and talented people who are striving to deliver for clients – and succeeding in creating better outcomes for them. It’s an honor to be at the helm of such a great firm, and I’m looking forward to doing what I can to build upon AB’s success from here.”

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.