Invesco Mortgage Capital’s Series C preferred shares have marginally outperformed the iShares Preferred and Income Securities ETF (PFF) in 2024, reflecting a high single-digit gain versus mid-single-digit returns for the benchmark.
This outperformance is expected to persist due to well-covered dividends supported by net income and common equity. The Series C shares also offer secure current income and potential gains if Fed rate cuts materialize as expected.
Company Overview
Invesco Mortgage Capital (IVR) operates primarily as a mortgage real estate investment trust (mREIT), focusing predominantly on agency securities, particularly residential mortgage-backed securities (RMBS). As of Q1 2024, RMBS constituted 92.8% of the portfolio, underscoring its strategic investment in stable, government-backed securities:
To maximize returns, IVR utilizes significant leverage, with a debt-to-equity ratio standing at 5.6 as of Q1 2024.
Preferred Dividend Coverage
In Q1 2024, Invesco Mortgage Capital paid $5.6 million in cumulative preferred dividends, supported by $29.1 million in net income before preferred distributions, covering dividends by 5.2 times. While prior periods showed less robust coverage amidst Fed rate hikes starting in 2022, recent quarters have demonstrated improving financial metrics.
The trend indicates a positive swing in coverage expected over the next twelve months, bolstered by anticipated Fed rate cuts.
Outlook for Fed Rates
Market futures suggest the Federal Reserve may lower rates to 4.00-4.25% by July 2025, reflecting a 1.25% decrease from current levels. This outlook supports continued improvement in preferred dividend coverage, with Fed officials projecting further cuts towards 2.8% in the long term:
Recent economic data, such as the June U.S. jobs report, highlights nuances in the labor market, influencing market expectations for rate cuts through mid-2025.
Preferred Stock Comparison
Invesco Mortgage Capital issues two series of preferred shares. The Series C (IVR.PR.C) pays a fixed annual interest rate of 7.5%, transitioning to a floating rate based on the three-month CME Term SOFR plus a spread of 5.289% from September 27, 2027:
- Series C Highlights:
- Offers an 8.16% yield, slightly above Series B’s 7.9%.
- Provides an 8.8% upside to its $25 par value, compared to 2.1% for Series B.
- Represents a potential call option on significant Fed rate cuts in a recessionary environment until 2027.
Preferred Coverage by Market Capitalization
As of Q1 2024, Invesco Mortgage Capital had $293.5 million in par value across its preferred shares, covered 1.47 times by its $430 million market cap. Shareholders’ equity of approximately $492 million further strengthens coverage ratios, mitigating risks associated with mortgage market volatility and potential Fed rate hikes:
Risks and Volatility
The main risks include volatility in the mortgage market and potential Fed actions affecting interest rates. However, IVR’s focus on agency securities and favorable monetary policy outlooks mitigate these risks, supporting preferred dividend stability.
Attractive Share Opportunity
Invesco Mortgage Capital’s Series C preferred shares offer an attractive opportunity, underpinned by improving financial metrics and anticipated Fed rate cuts. With secure dividend coverage and potential gains in a recessionary environment, Series C presents a compelling investment case for income-seeking investors looking for stability and yield in preferred securities.
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Dean is a freelance content writer who contributes to various Digital Media Companies and independent websites all over the world. He has over 20 years of financial industry experience, so it’s safe to say he’s well informed.
