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

Profitability

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

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

Analyst Recommendations

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

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Redwood Trust 0 0 0 0 N/A
Dynex Capital 0 2 0 0 2.00

Dynex Capital has a consensus target price of $7.25, indicating a potential upside of 2.11%. Given Dynex Capital’s higher possible upside, analysts clearly believe Dynex Capital is more favorable than Redwood Trust.

Dividends

Redwood Trust pays an annual dividend of $1.12 per share and has a dividend yield of 6.8%. Dynex Capital pays an annual dividend of $0.72 per share and has a dividend yield of 10.1%. Redwood Trust pays out 64.0% of its earnings in the form of a dividend. Dynex Capital pays out 46.8% 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.

Volatility and Risk

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

Valuation & Earnings

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

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Redwood Trust $215.70 million 5.87 $134.95 million $1.75 9.38
Dynex Capital $105.39 million 3.32 $75.82 million $1.54 4.61

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.

Institutional and Insider Ownership

84.7% of Redwood Trust shares are owned by institutional investors. Comparatively, 44.4% of Dynex Capital shares are owned by institutional investors. 2.3% of Redwood Trust shares are owned by company insiders. Comparatively, 7.1% of Dynex Capital shares are owned by company insiders. Strong institutional ownership is an indication that endowments, hedge funds and large money managers believe a company is poised for long-term growth.

Summary

Redwood Trust beats Dynex Capital on 9 of the 14 factors compared between the two stocks.

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.

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.

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