Two Harbors Investment (TWO): Evaluating Valuation Following the Recent Dividend Reduction

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If you’re holding shares of Two Harbors Investment (TWO) or considering adding it to your watchlist, the latest dividend news probably raised your eyebrows. The company’s Board of Directors just announced a reduced third quarter dividend for common shareholders, a move that often stirs debate about management’s outlook. While preferred dividends remain steady for now, this lower payout on common shares signals that management might be rethinking its priorities given the current earnings environment.

Even before this change, Two Harbors Investment stock had not been on a winning streak. Over the past year, shares are down 15%. Longer-term performance has also been underwhelming, with momentum continuing to fade throughout the year. The dividend cut comes in addition to annual revenue that shrank, while net income bounced back from deeper losses. This creates a complicated picture for investors tracking value and risk.

With this recent adjustment and a lagging share price, some may wonder whether Two Harbors Investment is now a bargain, or if the current price already reflects Wall Street’s expectations for future growth setbacks.

Price-to-Sales Ratio of 4.1x: Is it justified?

Two Harbors Investment is currently valued at a Price-to-Sales (P/S) ratio of 4.1x, which suggests the stock is somewhat expensive compared to both its industry peers and broader valuation benchmarks.

The Price-to-Sales ratio measures how much investors are willing to pay for each dollar of a company’s revenue. For mortgage REITs and similar financial stocks, this ratio is particularly useful when companies are unprofitable or earnings are volatile. Revenue is generally a more stable metric than net income.

Looking specifically at the current figures, the stock’s P/S ratio is higher than the peer average of 3.9x and is considerably above the estimated fair value multiple of 0.3x. While it is slightly cheaper than the broader US Mortgage REITs industry at 4.4x, the valuation implies that investors expect positive revenue growth or improved earnings quality. However, with recent revenue decline and ongoing challenges, the market may be overestimating the company’s ability to rebound.

Result: Fair Value of $9.79 (OVERVALUED)

See our latest analysis for Two Harbors Investment.

However, a surprise rebound in revenue growth or a sharp recovery in net income could challenge the current negative outlook for Two Harbors Investment.

Find out about the key risks to this Two Harbors Investment narrative.

Another View: DCF Model Perspective

While the price-to-sales multiple shows Two Harbors Investment as expensive, our DCF model presents a similar outlook and suggests the shares are trading above fair value. Could the market be missing a potential turnaround?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out Two Harbors Investment for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover undervalued stocks based on their cash flows. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Build Your Own Two Harbors Investment Narrative

If you want to look beyond this analysis or prefer to dig into the numbers yourself, you can easily develop your own view in just a few minutes. do it your way.

A great starting point for your Two Harbors Investment research is our analysis highlighting 1 key reward and 1 important warning sign that could impact your investment decision.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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