American Capital Agency (AGNC). It is a Real Estate Investment Trust (REIT), which earns income mainly from investing in agency mortgage-backed securities on a leveraged basis. The investment includes residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored entities, such as Fannie Mae and Freddie Mac, or a U.S. Government agency, such as the Ginnie Mae. AGNC may also invest in agency debenture securities issued by Freddie Mac, Fannie Mae or the Federal Home Loan Bank. It is required to distribute annually 90% of its taxable net income.
Since inception, AGNC has consistently kept the average net interest spread (the difference between average asset yield and average cost of funds) at the range of 2.3% and 2.9%, and produced the average ROE in the range of 18.5% and 33.5%. In 2011, there was huge growth in AGNC’s investment portfolio. It grew from $13.5 billion in 2010 to $54.7 billion, which were invested in agency mortgage-backed securities. Those investments were financed mainly by repurchase agreement and four follow-on public offerings of AGNC to the public.
The quarterly dividend is $1.25 per share. Its current share price is $34.82, so the dividend yield is 14.36%. With more than 340 million shares, the total market capitalization is nearly $11.9 billion. Currently, the market is valuing AGNC at 9.7x earnings and 1.3x book value.
In August 2012, Gary Kain, president and investment officer bought 20,000 shares of the company with the total value of $655,000. The same month, Senior Vice President Christopher Kuehl and Independent Director Morrin Davis sold a few shares with the total value of nearly $50,000.
Annaly Capital Management (NLY). This is another REIT. It owns, manages and finances a portfolio of real estate-related investments, including mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures and other securities representing interests in or obligations backed by pools of mortgage loans.
Over the past five years, NLY has had lower net interest spread compared to AGNC. The net interest spread has been in the range 0.7% and 2.52%, and was 2.09% at the end of 2011. The net income in 2011, which was just 27% of the previous year, was due to the unrealized loss in the company’s interest rate swap operation.
With the current share price of $17.47 per share, the total market capitalization of NLY is more than $17 billion. The dividend yield is 12.59%. The market is valuing NLY at 54.6x earnings and 10% above its book value.
Chuck Akre is the guru who has been adding more NLY stocks in his fund’s portfolio. Now he is holding nearly 1.5 million shares of NLY.
Seadrill Limited (SDRL). It is an offshore drilling contractor providing worldwide offshore drilling services to the oil and gas industry, operating in three main segments: floaters (world-wide), jack-up rigs (world-wide) and tender rigs (in Southeast Asia and Africa).
This Bermuda-based company has been generating high return on equity since 2009, in the range of 24% and 37%. Over the last five years, the company has kept producing an increasing and positive operating cash flow. The operating cash flow in 2011 was more than $1.8 billion. However, because of required high capital spending, the free cash flow has been negative.
Just yesterday, the company announced the second-quarter 2012 dividend of $0.84 per share. With the current share price of $40.42, the dividend yield is 8.31%. The market capitalization is nearly $19 billion on more than 468 million shares outstanding.
SDRL is trading in the market at 21 times earnings, 3.1x book value and 11.2x its operating cash flow.
Guru James Barrow has currently added more SDRL in his portfolio. Now his fund is holding more than 12.6 million shares of the company.