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Is American Capital Agency The Right Stock For Your Portfolio?

July 28, 2012 | About:

American Capital Agency Corp. (NASDAQ:AGNC) focuses on investing in collateralized mortgage obligations (CMOs) and agency pass-through securities. Principal and interest payments for these CMOs and agency pass-through securities are backed by U.S. government agency or government sponsored entity. The trust generates net income in shape of the spread. The investments of the agency are funded by short term borrowings which are structured as repurchase agreements, investment portfolio is used as collateral. The spread comes from the difference between the interest earned on the investment activities, and interest costs on financing and hedging activities. The agency is managed externally by American Capital AGNC management, LLC, which is an indirect subsidiary of the portfolio company, American Capital. American Capital is a publically traded global asset manager and private equity fund.

American Capital Agency looks to preserve the book value and generate income to make distributions to the stock holders. American Capital Agency makes profits by capitalizing on relative mispricing in the agency securities market. American Capital Agency qualifies as a REIT and remains exempt from the requirements of the investment company act of 1940.

Stock Performance:

AGNCc1dl0000.pngSource: Finviz

AGNC stock closed the week at $35.38. Stock experienced a 3% increase in the last week. Since October, this stock has been on a rise. Ascend has been steady for the Agency stock. Average daily volume for the stock is 5.92 million shares. AGNC stock has a very low beta of .23. The 52 week range for the stock is $18.44 - $35.38. Thanks to the bullish investor sentiment, the stock is making it to new highs every week. Agency has a market cap of $10.6 billion.

Ratio Analysis:

The stock is quite cheap with a price-to earnings ratio of 5.1, and a forward P/E ratio of 6.0. PEG for the stock is 2.68, showing some volatility. Earnings per share [ttm] for the company is $6.20. P/B ratio is 1.2, whereas P/S ratio is 4.8, both of which are way lower than their industry averages. Price to book ratio in the dividend paying stocks universe is 1.8. Sales for the REIT were $1.46 billion and a net income of $1.28 billion. Revenues recorded an exceptional growth of 338.30%, while the growth in income was 167.40%. Profit margin for the trust is amazingly high at 92.8%. It has a debt to equity ratio of over 8; this leverage number is in the range of the leverage defined by the business plan of the company. Agency wants to maintain a leverage of between five to ten times of the owner's equity. According to the investment strategy outlined by the company, investments usually have maturities of 30 to 90 days. The borrowings can also be for 364 days if need be. Firm recorded an impressive ROE of 21.19%. Insider transactions for the last six months have increased by 114.29%. Agency has no long term debt; all of its debt is short term borrowings made for investment purposes.

Dividend Analysis:

Dividends from the third quarter during the period of year 2009 and the fourth quarter of 2011 have been constant. There was a decline in the dividends from the first quarter of the year 2012. On June 20th, the company announced a preferred dividend of $.556 per share. The stock went ex-dividend on June 27th, which was paid on July 16th. Recent second quarter dividend for commons stocks was $1.25 per share.

High dividend yield makes it an attractive investment for the institutions. REITs usually pay about 90% of earnings to investors. The main focus of the REITs is to pay back to investors in shape of dividends. Agency had been paying a quarterly dividend of $1.40 till the last quarter of year 2011. The Agency decreased the dividend to $1.25 after paying 10 consecutive dividends of $1.40. Payout ratio for American Capital Agency is just above 70%. Last annual dividend paid by the firm was $5. Annual dividend yield for American Capital Agency was amazingly high at 15.39%, while the dividend yield in the dividend paying stocks universe is 3.9%.

American Capital Agency has been named among the top ten REITs by dividend channel. Total return on American Capital Agency (price appreciation and assumed reinvested dividends) was 43.57%. In the same period, returns for its peers, Hatters Financial and Two Harbors Investments were 17.16% and 26.22% respectively. Total return on S&P 500 for the last year was 5.40%. American Capital Agency comprehensively beats its peers and the market on total return. American Capital Agency peers also have a high dividend yields, Hatters Financial and Two harbors having a dividend yield of 12% and 14.59% respectively. REITs can also face smaller dividends or even no dividends in periods of low earnings or losses.

Spread Analysis:

American Capital follows an investment strategy, which focuses on borrowing in the short term treasuries market and investing in the long term mortgage backed securities. Recently the yields on the government securities have been at its lowest. Low yields on the borrowings make interest cost for American Capital remarkably low. At the same time, the investments are in the high yield default free mortgage securities. American Capital only invests in agency backed securities, which eliminates the risk of default almost entirely. Investing in only agency backed securities means a lower portfolio return, but high leverage magnifies the lower return. Borrowing at low rates and investing at relatively high yields gives American Capital an attractive spread. American Capital has an investment yield of 3.1%, which close the range of its peers at 3.1%-3.2%. A similar mREIT is Annaly Capital (NYSE:NLY). In order to reduce its exposure to spread squeeze risk, Annaly has reduced its leverage recently. The current leverage of Annaly is 5.84. Chimera (NYSE:CIM) has a riskier portfolio consisting of agency backed and non-agency backed securities and yields 7.2%.


American Capital Agency is a very attractive stock for people looking for regular dividend income. The stock has a steady history of dividend. In the last years, shareholders were awarded with terrific returns supported by fat dividends. American Capital has experienced a boom in recent years. Low borrowing rates and high investment returns have yielded high spread for the Agency. This trend is expected to continue as the Fed announced that the interest rates are expected to be zero through 2014. Although the dividend payout ratios will come down, at the moment, American Capital Agency looks in a strong position. As long as the low interest atmosphere keeps going on, AGNC is likely to outperform.

About the author:

Efsinvestment.com website offers simple do-it-yourself type of investment ideas. You can download excel files that can easily calculate the Fair Value of a stock, along with O-Metrix score and Margin of Safety.

Investment philosophy is to first determine the maximum loss, and invest accordingly. Like many value investors, we prefer to invest in stocks with the highest dividend yields, and highest EPS growth potentials. Telecommunication and energy stocks in emerging markets are among the favorites.

Based on extensive quantitative analysis, in any market, going short is risky. Statistical analysis shows that technical indicators work only if they are strong enough to convince the majority of the investors. Do not buy a stock at the top, do not sell a stock at the dip.

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