United Wholesale Mortgage (UWM) shares experienced their steepest decline ever, dropping 22% to $6.67, after CEO Mat Ishbia announced a halt to the company's quarterly dividend. This decision, aimed at strengthening the balance sheet and improving leverage, came despite previous assurances from Ishbia that the dividend was sustainable. The company had been paying out approximately $640 million annually in dividends, which analysts noted was more than its projected earnings for the rest of 2026.
The dividend halt follows a challenging period for UWM. In its second-quarter earnings, the company missed analyst expectations for GAAP and operating earnings per share, reporting $0.03 and $0.04 respectively, despite beating origination estimates with $33.6 billion in production. The net income for the quarter was $76.3 million, a significant drop from $180.5 million in the prior quarter and $228.8 million a year ago, largely due to a $115.3 million reduction in the fair value of its servicing rights.
Analysts had previously highlighted concerns about UWM's high debt-to-equity ratio, which stood at 3.1x, significantly above its peers. KBW had suggested that a dividend cut of at least 50% could reduce this ratio to about 2.4x by the end of 2027, with a 70% cut potentially bringing it down to 2.2x. While some analysts, like BTIG's Eric Hagen, had recently raised price targets based on potential lower mortgage rates, others, like KBW, maintained an "Outperform" rating with a $3.75 price target, citing depressed valuation and the potential for balance sheet improvement. The failed acquisition of Two Harbors was also seen as removing leverage risk and increasing the likelihood of a dividend cut.
UWM has been actively selling mortgage servicing rights (MSRs) to de-leverage, generating nearly $2.6 billion in proceeds through Q2. This strategy helped reduce its MSR portfolio from $229.7 billion to $189.5 billion with a lower weighted average interest rate. Despite Ishbia's shift in focus to origination and industry dominance, the company had been consistently selling MSRs with higher coupons to de-risk its portfolio. The market's reaction suggests that while a dividend cut was anticipated by some analysts as a necessary step for financial health, the outright halt was more severe than expected, leading to a substantial stock price drop.
The company is trading at about five times its estimated 2027 earnings, which KBW described as historically low. Analysts believe that an improved financial position resulting from the dividend cut could make UWM a buying opportunity, allowing investors to focus on the strength of its franchise.
