What is RWT's Intrinsic value?

Redwood Trust Inc (RWT) Intrinsic Value Analysis

Executive Summary

As of June 21, 2025, Redwood Trust Inc's estimated intrinsic value ranges from $3.67 to $6.44 per share, depending on the valuation methodology applied.

Valuation Method Fair Value (USD) Implied Upside/Downside
Dividend Discount Model (Multi-Stage) $3.67 -34.7%
Dividend Discount Model (Stable) $6.44 +14.6%

Is Redwood Trust Inc (RWT) undervalued or overvalued?

With the current market price at $5.62, the stock appears to be moderately overvalued.

Understanding Intrinsic Value

Intrinsic value represents the "true" worth of a company based on its fundamentals rather than market sentiment. We've employed multiple methodologies to triangulate Redwood Trust Inc's intrinsic value, including:

  1. Dividend Discount Model (DDM): Values the company based on expected future dividend payments

Weighted Average Cost of Capital (WACC)

The cost of capital is a critical factor in valuation models, representing the required return for investors.

WACC Component Low High
Long-term bond rate 3.9% 4.4%
Equity market risk premium 4.6% 5.6%
Adjusted beta 0.68 1.14
Cost of equity 7.0% 11.2%
Cost of debt 4.9% 23.9%
Tax rate 8.7% 16.9%
Debt/Equity ratio 22.09 22.09
After-tax WACC 4.6% 19.5%

Valuation Methods

2. Dividend Discount Model (DDM)

The DDM values a company based on its expected future dividend payments. We used two approaches:

Multi-Stage DDM:

  • Current payout ratio: 258.6%
  • Stable payout ratio: 90.0%
  • Growth transition: 5 years
  • Cost of equity: 9.1%
  • Long-term growth rate: 3.7%
  • Fair value: $3.67 (-34.7% from current price)

Stable DDM:

  • Stable payout ratio: 70% (Low) to 90% (High)
  • Cost of equity: 11.2% (Low) to 7.0% (High)
  • Long-term growth rate: 3.0% (Low) to 4.4% (High)
  • Fair value range: $3 to $10
  • Selected fair value: $6.44 (14.6% from current price)

Key Financial Metrics

Metric Value
Market Capitalization $748M
Enterprise Value $18707M
Trailing P/E 18.76
Forward P/E 54.82
Trailing EV/EBITDA 53.60
Current Dividend Yield 1361.81%
Dividend Growth Rate (5Y) 4.43%
Debt-to-Equity Ratio 22.09

Investment Decision Framework

To determine the most reliable intrinsic value estimate, we weigh each valuation method based on:

  1. Forecast Certainty: DCF methods rely on long-term projections, while earnings power value focuses on current normalized earnings
  2. Business Model Alignment: Dividend models are more appropriate for mature companies with established dividend policies
  3. Historical Accuracy: How well each method has predicted fair value historically

Valuation Weight Matrix

Valuation Method Weight Weighted Value
Dividend Discount Model (Multi-Stage) 57% $0.73
Dividend Discount Model (Stable) 43% $0.97
Weighted Average 100% $4.86

Investment Conclusion

Based on our comprehensive valuation analysis, Redwood Trust Inc's weighted average intrinsic value is $4.86, which is approximately 13.6% below the current market price of $5.62.

Key investment considerations:

  • Strong projected earnings growth (5% to 27% margin)
  • Consistent cash flow generation
  • Historical dividend growth of 4.43%

Given these factors, we believe Redwood Trust Inc is currently moderately overvalued with the potential for long-term appreciation based on the company's growth trajectory and financial strength.