Invesco Mortgage Capital Attracts 92% of Revised Book Value
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Mortgage capital Invesco (NYSE:IVR) is an attractively priced mortgage REIT with a 10.8% dividend yield well covered by its earnings. Plus, its price of $ 3.33 is still lower than its book value per share. Based on my calculations, the new book value of IVR shares is $ 3.62, down slightly from $ 3.65 at the end of the first quarter of 2021.
This means that it is trading at around 92% of its adjusted book value as of March 31. Depending on the development of interest rates in the second quarter, its new book value in the second quarter may in fact be greater than this. Here’s how it works: If interest rates go down, the prices of the value of its mortgage assets go up and the value of its debts goes down.
Let’s take a closer look at the IVR stock.
Revised book value of Invesco Mortgage Capital
On May 27, Invesco announced that it had raised $ 128.625 million for 37.5 million shares. That’s effectively $ 3.43 per share. Additionally, there was a broker’s âgreen shoe optionâ for an additional 5.625 million shares. As a result, the company raised a total of $ 147.9 million before capital raising fees and commissions.
On page 35 of the company’s 10-Q filing, it shows the calculation of its book value per share. I have put the table together below to show this calculation and the revision which includes the new capital.
Click to enlarge
Source: Mark R. Hake, CFA
This shows that the book value per share fell to $ 3.63 per share from $ 3.65 after the capital increase. The money was going to be used to redeem his Series A preferred shares, but this does not affect the calculation of the revised book value.
But that may not be what Invesco says for its book value as at June 30, 2021. That’s because its mortgage-backed securities, which make up the bulk of its assets, trade based on changes in rates. of interest.
For example, if interest rates typically rise, it lowers the prices of a company’s bonds and mortgage securities. This is because fixed coupon securities must adapt to higher rates by lowering their price to offer the same higher rate, despite the lower coupon rate. This inverse relationship between rate and price is well known and embedded in fixed income markets.
The effect of rate changes on the book value of the IVR
So, if interest rates continue to rise as they did last year, expect to see the net asset value (NAV) or book value per share (BVPS) of the IVR stock drop ( and vice versa.)
The good news is that long-term interest rates generally fell in the second quarter.
Click to enlarge
Source: Yahoo Finance symbol ^ TNX
This can be seen in this Yahoo! Financial graph that represents the yields of the 10-year Treasury. After peaking at around 1.746% on March 31, they are now valued at around 1.3%.
So it looks like investors can expect an overall gain in Invesco’s BVPS for the second quarter. If the rates stay at this level, the BVPS of Q3 will certainly be higher.
The IVR share price is expected to rise accordingly, as it tends to follow the price movements of the underlying BVPS.
What to do with the IVR stock
Here’s the good news: IVR pays a quarterly dividend of 9 cents per share. This means that if we divide its annualized dividend of 36 cents by today’s price, $ 3.33, the dividend yield is 10.81%.
It is a very high return. It’s almost as if the market thinks the company won’t be able to pay the dividend. But the recent capital increase, intended to reduce the cost of its debt, should reassure investors in this regard.
In other words, even if the IVR stock is now selling below its book value, at least you get paid well to wait for it to rise. This is expected to happen when its second quarter results are released around August 5.
As of the publication date, Mark R. Hake does not hold any position in any of the stocks mentioned in the article. The opinions expressed in this article are those of the author, subject to the publication guidelines of InvestorPlace.com.
Mark Hake writes about personal finance on mrhake.medium.com and run the Total Value of Return Guide which you can consult here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.