IVR - Invesco Mortgage Capital: Strong Bearish Trend Shows No Sign Of A Reversal

2023-10-19 01:57:02 ET

Summary

• Invesco Mortgage Capital shares have been on a downward trend, losing about 50% and trading at a new 52-week low.
• The company's low net interest and declining book value make it an unfavorable investment choice.
• IVR's dividend history is characterized by declining dividends and a poor payout ratio, making it an unsustainable investment.
• Given the strong bearish trajectory as shown by my technical analysis, I rate the stock a sell.

Investment Thesis

Invesco Mortgage Capital Inc. (IVR) shares have been on a downward trajectory after hitting its 52-week high of $15.56. It has lost about 50% and its current price of $7.78 is a new 52-week low down from the previous $8.21. From a technical analysis, the stock appears to be in a strong bearish trend with no sign of a reversal. With its low net interest margins, high leverage , and declining book value, I believe the company is not a good investment at the moment.

Further, the rising interest rates , which will serve as a major headwind, rising costs, and reducing profitability margins, strengthens my skeptical view. Additionally, the company's dividend history is not pleasing since it is characterized by declining dividends and a poor payout ratio, which makes it unsustainable. Given this background and backed by technical analysis, I recommend selling the stock to avoid further losses.

Unimpressive IVR

Based on my analysis, IVR has some traits that make the stock unattractive. IVR stock has been declining after reaching its 52-week high of $15.56. It is currently trading at a new 52-week low of $7.78 after losing roughly 50%, and it appears to be in a strong bearish momentum based on technical analysis, as will be discussed later in this article. Further, the stock also has negative earnings per share [EPS] of -1.3, which indicates that the company is not profitable and, thus, in my view, is not a good investment. Further, its revenues have been poor for the last three years and currently stand at a negative value of $18.17 million, which is not pleasing in my view because it speaks volumes about how weak the company's financial health is.

IVR is also undesirable to me because of its falling book value. Its average book value per share growth rate over the past 12 months is -26.40% per year, the average annual growth rate of book value per share over the last three years is -57.00%, the average book value per share growth rate over the last five years is -43.00% annually and the average book value per share growth rate over the previous ten years is -21.10% annually.

This demonstrates unequivocally that the company's net worth has decreased dramatically over the past ten years, and the trend seems to continue. I believe this trend has been propelled by factors such as the unfavorable interest rate environment, which has reduced the value and profitability of the company's mortgage investments, especially the agency residential mortgage-backed securities (Agency RMBS). The company stated that its book value declined due to a historically challenging environment for Agency RMBS, as expectations for the removal of monetary policy accommodation by the Federal Reserve accelerated further.

Secondly, it could be due to the poor financial results and dividend cuts, which have reduced the confidence and trust of investors, analysts, and customers in the company's future prospects and viability.

Based on this trend, I am skeptical about the company's future prospects because I believe a decline in book value could indicate that the company is not investing in its future growth or competitive advantage, such as innovation, research, and development. Further, it could signify that the company is impairing or writing off its assets, such as goodwill, intangible assets, and inventory. With this in mind, I believe IVR is not a good investment at the moment.

Indeed, the share prices could fall below the book value per share, which is the ratio of equity available to common shareholders divided by the number of outstanding shares. In my view, this could make the company vulnerable to takeover attempts or liquidation pressure.

Lastly, the company's economic return, which measures the change in its book value per common share plus dividends paid, was negative 1.8% in the second quarter of 2023. Further, the company has a total return of negative 87.86% over the last five years; this shows that the company's shareholders have suffered a substantial loss of value in their investment, which I believe makes it not a good investment choice at the moment.

The other element that, in my opinion, detracts from IVR is its dividend policy, which I will discuss in the succeeding section. These red flags, in my opinion, show that IVR is dealing with significant risks and challenges that could impair its capacity to produce revenue and add value for its shareholders. As a result, it might not be a good investment at this time.

Dividend: Very Volatile And Unsustainable

Since 2009, IVR has had a stable dividend payment record, with dividends presently distributed quarterly. Despite the consistent payout, its dividend payment has been highly volatile, with many dividend cuts, as illustrated below.

As of today, the company has a 12-month trailing dividend yield of 22.26% and a 12-month forward dividend yield of 19.25%. This suggests an expectation of decreased dividend payments over the next 12 months. The annual dividend growth rate for the company over the last three years is about 40%. This rate increased to about 31% annually when the time frame was stretched to five years. Additionally, its annual dividends per share growth rate over the past ten years has been approximately -17%. This explains how fickle and unappealing its dividend is, in my opinion.

In terms of sustainability, its dividend is quite unsustainable. IVR has a dividend payout ratio [TTM][GAAP] of zero. Further, with its poor profitability and earnings, It is reasonable to assert that its dividend is very unsustainable. In a nutshell, though very consistent, the company's dividend payment is very volatile and full of dividend cuts. In my opinion, it is quite unsustainable, which makes this company not a good dividend choice.

IVR's Positive Signs

Even though I have a negative outlook for the company, certain things are going for it that might make it a better investment prospect in the future.

• It has an opportunistic and diversified approach to investing in mortgage securities and loans, which allows it to capture a broader spectrum of opportunities and mitigate risks. I believe this approach can be very productive should the company turn around its fate and generate good returns on invested capital.
• It improved its liquidity position by raising $300 million of new equity capital in January 2022 and $31 million in Q2 2023 , which enhanced its ability to take advantage of market opportunities and reduce leverage. Although the move has a dilutive effect, the improved liquidity, if well utilized, can help the company turn around its woes at least marginally.

Technical Analysis

Here is my technical analysis for IVR based on several indicators. To begin with, the stock price has been in a downtrend since February 2023, when it reached a 52-week high of $15.56. It has lost about 50% of its value since then and is currently trading at $7.78 a new 52-week low. The stock is below its 50-day, 100-day, and 200-day moving averages, which are also sloping downward, indicating a bearish trend.

The other indicators are the volume and momentum indicators. The on-balance volume [OBV] indicator shows that the selling pressure has been dominant in the past few months, as the OBV line has been making lower lows along with the price. The accumulation/distribution line also confirms the negative divergence between price and volume, indicating that investors are distributing their shares. The average directional index [ADX] shows that the downtrend is strong and stable, as the ADX line is above 25 and rising, while the negative directional indicator [-DI] is above the positive directional indicator [+DI].

The other indicators are the MACD and the RSI. The MACD indicator shows that the bearish momentum is increasing as the MACD line is below the signal line, and both lines are moving further away from the zero line. The MACD histogram is also negative and growing larger. Further, the RSI shows that the stock is oversold, as the RSI line is below 30. However, this does not necessarily mean that a reversal is imminent, as the RSI can remain oversold for a long time in a strong downtrend.

Based on my technical analysis, I would recommend investors avoid buying or holding IVR shares at this time, as the stock is in a strong downtrend and shows no signs of reversal; the best course of action is selling the shares and waiting until the bearish momentum reverses.

My Investment Take

Given the solid bearish momentum, as shown by the technical analysis and the unimpressive traits of IVR, I rate the company as a buy because the current momentum shows no signs of a reversal. To support my sell rating is a consensus sell rating with a declining price target, the SA, and Wall Street ratings as shown below.

For further details see: