In an update a few weeks ago, we discussed getting back into American Capital Agency (NASDAQ:AGNC) after the company declared its dividend and priced any secondary stock offering that usually occurs right after it posts earnings.
Well, all three of those events are now in the books, and shares of this popular mortgage REIT have pulled back 5.4% from its recent high.
AGNC primarily deals in fixed-rate government-backed residential mortgages backed by Fannie Mae and Freddie Mac. In the most recent Q4 results, American Capital Agency recorded an annualized economic return of 33% for the quarter. As of Dec. 31, 2011, the company’s investment portfolio was composed of $54.7 billion worth of agency securities at fair value, including $51.5 billion of fixed-rate securities, $2.8 billion of adjustable-rate securities and $0.4 billion of CMOs.
For the fourth quarter of 2011, AGNC reported earnings of $208.7 million, or 99 cents per share, compared with $138.1 million, or $2.50 in the year-earlier quarter. The decrease in quarterly earnings per share is primarily due to a higher number of weighted average shares in fourth-quarter 2011 compared with the prior-year quarter. Including one-time items, comprehensive income for the reported quarter was $476.8 million, or $2.27 per share, compared with $68.2 million, or $1.23 in the year-ago quarter.
During the reported quarter, the annualized weighted average yield on the company’s investment portfolio was 3.06%, and its annualized average cost of funds was 1.16%, resulting in a net interest rate spread of 1.90%. The company decreased its first-quarter 2012 dividend to $1.25 per share to reflect the narrowing of the spread along with the rise in leverage of the portfolio.
Even after a dividend reduction last month to compensate for the narrowing of the spread between borrowing short and investing long, shares of AGNC held their ground because, quite simply, the newly adjusted dividend yield was still huge by comparison with other REITs in the sector.
The company is using about nine times leverage to produce that 17% yield, and it’s employing a sophisticated interest rate hedging strategy to manage downside risk. Last week, AGNC priced 62 million shares in a secondary offering for proceeds of $1.8 billion for acquiring additional securities and is the latest offering by AGNC since it raised about $1 billion in late October 2011. The size of the offering was originally 54 million shares, but institutional demand allowed for the 10-million-share-over-allotment to kick in.
I was hoping to see the stock come in further after trading ex-dividend March 5 and pricing such a huge stock offering, but demand for the yield in this market is strong — and so is the stock’s price action. At its current price, we’re paying about 1.09 times book, which is a bit of a premium, but I don’t see that coming down, thanks to the attractiveness of the yield.
If AGNC management can pay out this kind of income in what I believe is the toughest of all environments for such entities, then as interest eventually ticks higher as the economy improves, the prospect for future dividend increases will grow, too. AGNC now ranks as one of the largest REITS, trading at a price-earnings multiple of under six. The company also continues to hold about $10 of cash per share.
The one overriding risk for AGNC is further tightening of the spread. The way to keep the dividend at current levels is to grow the portfolio to generate more income. Thus, raising $1.8 billion in new capital is a great vote of confidence in executing this very strategy.