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

Earnings & Valuation

This table compares Invesco Mortgage Capital and Redwood Trust’s revenue, earnings per share and valuation.

Gross Revenue Price/Sales Ratio EBITDA Earnings Per Share Price/Earnings Ratio
Invesco Mortgage Capital $609.31 million 3.24 $484.38 million $4.34 4.07
Redwood Trust $215.70 million 5.95 $134.95 million $1.75 9.51

Invesco Mortgage Capital has higher revenue and earnings than Redwood Trust. Invesco Mortgage 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.

Volatility and Risk

Invesco Mortgage Capital has a beta of 0.81, meaning that its stock price is 19% less volatile than the S&P 500. Comparatively, Redwood Trust has a beta of 0.87, meaning that its stock price is 13% less volatile than the S&P 500.

Profitability

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

Net Margins Return on Equity Return on Assets
Invesco Mortgage Capital 71.92% 8.97% 1.11%
Redwood Trust 61.33% 12.12% 2.68%

Analyst Recommendations

This is a summary of current ratings for Invesco Mortgage Capital and Redwood Trust, as provided by MarketBeat.com.

Sell Ratings Hold Ratings Buy Ratings Strong Buy Ratings Rating Score
Invesco Mortgage Capital 0 2 2 0 2.50
Redwood Trust 0 0 0 0 N/A

Invesco Mortgage Capital currently has a consensus target price of $17.75, indicating a potential upside of 0.45%. Given Invesco Mortgage Capital’s higher possible upside, equities analysts clearly believe Invesco Mortgage Capital is more favorable than Redwood Trust.

Institutional and Insider Ownership

63.4% of Invesco Mortgage Capital shares are held by institutional investors. Comparatively, 84.7% of Redwood Trust shares are held by institutional investors. 0.3% of Invesco Mortgage 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, large money managers and hedge funds believe a stock will outperform the market over the long term.

Dividends

Invesco Mortgage Capital pays an annual dividend of $1.64 per share and has a dividend yield of 9.3%. Redwood Trust pays an annual dividend of $1.12 per share and has a dividend yield of 6.7%. Invesco Mortgage Capital pays out 37.8% 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. Invesco Mortgage Capital is clearly the better dividend stock, given its higher yield and lower payout ratio.

Summary

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

About Invesco Mortgage Capital

Invesco Mortgage Capital Inc. is a holding company, which conducts its businesses through IAS Operating Partnership LP (the Operating Partnership) and subsidiaries. The Company’s objective is to provide risk-adjusted returns to its investors through dividends and through capital appreciation. It invests in residential mortgage-backed securities that are guaranteed by the United States Government agency, such as the Government National Mortgage Association or a federally chartered corporation, such as the Federal National Mortgage Association or the Federal Home Loan Mortgage Corporation (collectively Agency RMBS); RMBS that are not guaranteed by the United States Government agency; Credit risk transfer securities that are unsecured obligations issued by government-sponsored enterprises; commercial mortgage-backed securities; residential and commercial mortgage loans, and other real estate-related financing arrangements. It is externally managed and advised by Invesco Advisers, Inc.

About Redwood Trust

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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