Why Dynex Capital (DX) is on investors’ radar

Dynex Capital (DX) has not been driven by a single headline event recently, but the stock’s performance and fundamentals still give income focused investors a few concrete data points to think about.

The share price has eased in recent months, with a 30 day share price return of 4.56% and a year to date share price return of 9.38% in the red. However, the 1 year total shareholder return of 21.20% and 3 year total shareholder return of 58.88% show that longer term holders have still seen meaningful gains.

If you are weighing income focused ideas like Dynex Capital against other opportunities, this is a good moment to broaden your search and check out 19 top founder-led companies

With Dynex Capital trading at US$12.76 against an analyst price target of US$15.10 and carrying a high value score, you have to ask: is there still a buying opportunity here, or is the market already pricing in future growth?

Preferred P/E of 11.9x: Is it justified?

On a P/E of 11.9x, Dynex Capital does not look cheap relative to its direct peers, even though its share price of $12.76 sits below the average analyst target of $15.10 and scores well against an internal fair P/E benchmark.

The P/E ratio compares what you are paying today for each dollar of current earnings. For a mortgage REIT, it gives a quick read on how the market is pricing the earnings stream from its portfolio of mortgage backed securities and leverage profile.

Compared to the US Mortgage REITs industry average P/E of 11.3x and an even lower peer average of 9.6x, Dynex Capital trades at a clear premium. However, when evaluated against an estimated fair P/E of 17.4x, that premium appears more moderate and indicates that the current valuation sits between peers and the internal fair value reference point.

Result: Price-to-earnings of 11.9x (ABOUT RIGHT)

However, you still have to weigh risks such as sector wide pressure on mortgage REITs and the possibility that earnings or dividend expectations will be reset lower.

Another view: DCF points the other way

While the current P/E of 11.9x suggests the price looks roughly in line with earnings, the SWS DCF model paints a very different picture. On this view, Dynex Capital at $12.76 is trading well above an estimated future cash flow value of $4.92, which implies significant downside risk if the market leans more on cash flows than earnings multiples.

That kind of gap can matter for income focused investors who care about both dividends and capital preservation. It is therefore worth asking which lens will end up driving this stock’s next big move. 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 Dynex Capital 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 47 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

Given the mix of upbeat and cautious signals so far, now is a useful time to look through the data yourself and stress test your own view of Dynex Capital’s prospects. A good starting point is its 3 key rewards and 3 important warning signs.

Looking for more investment ideas?

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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.