Comparing Redwood Trust (RWT) and Dynex Capital (NYSE:DX)

Dynex Capital (NYSE: DX) and Redwood Trust (NYSE:RWT) are both small-cap finance companies, but which is the better business? We will compare the two businesses based on the strength of their valuation, risk, profitability, institutional ownership, earnings, dividends and analyst recommendations.

Risk and Volatility

Dynex Capital has a beta of 0.84, indicating that its share price is 16% less volatile than the S&P 500. Comparatively, Redwood Trust has a beta of 0.87, indicating that its share price is 13% less volatile than the S&P 500.

Valuation & Earnings

This table compares Dynex Capital and Redwood Trust’s revenue, earnings per share (EPS) and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Dynex Capital $105.39 million 3.43 $75.82 million $1.54 4.77
Redwood Trust $215.70 million 5.96 $134.95 million $1.75 9.52

Redwood Trust has higher revenue and earnings than Dynex Capital. Dynex Capital is trading at a lower price-to-earnings ratio than Redwood Trust, indicating that it is currently the more affordable of the two stocks.

Analyst Ratings

This is a breakdown of recent ratings and recommmendations for Dynex Capital and Redwood Trust, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Dynex Capital 0 2 1 0 2.33
Redwood Trust 0 0 0 0 N/A

Dynex Capital currently has a consensus target price of $7.38, indicating a potential upside of 0.48%. Given Dynex Capital’s higher possible upside, research analysts plainly believe Dynex Capital is more favorable than Redwood Trust.

Dividends

Dynex Capital pays an annual dividend of $0.72 per share and has a dividend yield of 9.8%. Redwood Trust pays an annual dividend of $1.12 per share and has a dividend yield of 6.7%. Dynex Capital pays out 46.8% of its earnings in the form of a dividend. Redwood Trust pays out 64.0% of its earnings in the form of a dividend. Both companies have healthy payout ratios and should be able to cover their dividend payments with earnings for the next several years. Dynex Capital is clearly the better dividend stock, given its higher yield and lower payout ratio.

Insider and Institutional Ownership

44.4% of Dynex Capital shares are held by institutional investors. Comparatively, 84.7% of Redwood Trust shares are held by institutional investors. 7.1% of Dynex Capital shares are held by company insiders. Comparatively, 2.3% of Redwood Trust shares are held by company insiders. Strong institutional ownership is an indication that endowments, hedge funds and large money managers believe a stock will outperform the market over the long term.

Profitability

This table compares Dynex Capital and Redwood Trust’s net margins, return on equity and return on assets.

Net Margins Return on Equity Return on Assets
Dynex Capital 93.54% 11.04% 1.25%
Redwood Trust 46.04% 12.02% 2.50%

Summary

Redwood Trust beats Dynex Capital on 9 of the 15 factors compared between the two stocks.

Dynex Capital Company Profile

Dynex Capital, Inc. is an internally managed mortgage real estate investment trust, which invests in residential and commercial mortgage securities on a leveraged basis. The Company’s objective is to provide attractive risk-adjusted returns to its shareholders over the long term that is reflective of a leveraged fixed income portfolio with a focus on capital preservation. It seeks to provide returns to its shareholders through regular quarterly dividends and through capital appreciation. It invests in Agency and non-Agency mortgage-backed securities (MBS). MBS consists of residential MBS (RMBS), commercial MBS (CMBS) and CMBS interest-only securities. Agency MBS have a guaranty of principal payment by an agency of the United States Government or a government-sponsored entity (GSE), such as Fannie Mae and Freddie Mac.

Redwood Trust Company Profile

Redwood Trust, Inc., through its subsidiaries, focuses on investing in mortgage and other real estate related assets. The Company is engaged in mortgage banking activities. The Company operates through three segments: Residential Investments, Residential Mortgage Banking and Commercial. The Residential Investments segment includes a portfolio of investments in residential mortgage-backed securities (RMBS) retained from its Sequoia securitizations. The Residential Mortgage Banking segment consists of operating a mortgage loan conduit that acquires residential loans from third-party originators for subsequent sale, securitization, or transfer to its investment portfolio. Its Commercial segment consists of investments in multi-family securities and commercial mortgage-backed securities, as well as a remaining commercial loan investment following the sale of the remainder of its commercial mezzanine loan portfolio.

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