I'm seeing a lot of confusion on this topic so I thought I would post my thoughts on it.
A lot of the confusion here may stem from management's wording in their explanation of the GAAP earnings. They stated that total GAAP earnings would be $2.25 or higher, but that ordinary income would be $1.20 or higher "net of certain items".
Let me begin by clearing something up - management stated they expected the following:
GAAP Net Income: $2.25 or higher
GAAP Ordinary (repeatable)income: $1.20 or higher
The ordinary number is a subset of the Net number (the $1.20 is included in the $2.25). The ordinary income would be exclusive of ("net of") items like unrealized gains, etc that are not considered regular part of the business for accounting purposes. But the total earnings are still $2.25. The $1.20 is NOT the net earnings, nor the taxable earnings estimate.
They did not provide a number estimate for the Taxable income on the quarter. They simply stated they expected it to be less than the GAAP net income of $2.25.
Here is the relevant paragraph from the announcement:
"The Company expects that taxable net income for the quarter will be lower than GAAP net income, due partly to the deferred recognition of certain unrealized gains/losses for tax purposes and other timing related differences. AGNC expects that its undistributed taxable income as of December 31, 2010, will exceed $40 million and that the Company will incur a federal excise tax of less than $1.0 million as a result of its decision to defer a portion of its 2010 taxable income."
Please note that undistributed taxable income was $39 million at the end of Q3. It is estimated to be $40 million at the end of Q4. To me, the obvious implication is that the Q4 taxable earnings covered the $1.40 dividend paid in December - otherwise they would have projected a drop in undistributed income.
Putting actual numbers to the taxable earnings is pure speculation at this point, but I think certain inferences can be drawn by carefully reading what management said.
I believe this statement was issued early in the hopes of limiting the any potential negative impact that concerns about the sustainability of the dividend would have on the secondary.
Obviously, those of you not comfortable with making inferences, or those of you seeking certainty, will have to wait for the earnings & dividend announcements.
For the rest of us, well, there is no reward without at least some measure of risk. I think its clear they had sufficient taxable income in Q4 and see no reason (given the jump in both the Net and ordinary GAAP numbers) to project a dividend cut for Q1 2011.
But that is just an educated guess on my part.
I think I understand what they were trying to accomplish with this announcement, but (like you) I question how much impact it actually had. Yes, they indicated the div maybe covered, but they also highlighted the core earnings issue.
I believe the pps movement on this secondary could have a much simpler explanation - namely the successful recovery of the pps following the previous three issuances. That is not the most rational explanation, but, if the market was always rational, there would never be bubbles, crashes, etc.
You are correct about the core earnings issue and the importance of the taxable income number. In reality, the taxable income number also has the same two components the GAAP number does - ordinary (core) earnings and non-repeatable items.
In an ideal world, the dividend would be covered by your core taxable earnings. But the core taxable earnings are not a required disclosure, so we use core GAAP earnings as a proxy. Although the difference between core GAAP earnings and the dividend is narrowing, it is not yet there. So the market will continue to discount the div imo.
As always seem to the be case with this board, there seems to be much intelligent discussion, coupled with respect. I am sure I will have a chance to trade AGNC again this quarter, but darn did did miss a nice $1.00 (approximately run). Anyway, AGNC remains on my watch list. This week my focus is apple. Now, if you want to have some fun follow that board for a few minutes.
Thanks jdg, very well reasoned, thanks for that.
My S.W.A.G. based on past performance, my estimates, and the additional disclosure puts 4q 2010 taxable earnings at ~$94M, or $1.65 per weighted average shares outstanding. What's your guess?
I hope you are correct because I got very similar numbers. Here's my best guess:
Taxable Income: $92.8 million
Per share: $1.64
Its been a while since I've had to calculate a weighted average outstanding share number (I specialize in corporate & trust taxation, so audit disclosures are a bit foreign to me), so I'm a bit more confident in the gross number than the per share piece.
I looked at the differences between GAAP & tax earnings for both the past few years annual data and each 2010 quarterly piece, than took an educated guess on the impact of the Q4 environment to come up with an initial estimate closer to $98 million. But I adjusted that downward based on an analysis of the undistributed earnings account.
I think I made it harder than it had to be, but hopefully I didn't completely waste my time...
Fantastic and well-written description of what they were trying to achieve. Obviously, you guys would have read by now, it had the exact opposite effect on me I did not take a risk and an opportunity loss was the result. I talked myself out of it completely and raised far too many questions.
I am not in the camp of thinking March is safe, but I am glad the market might think it. There is plenty of time left., and if the market wants to buy, I will be there again soon enough.
With the distinctions between ordinary, repeatable (core) and taxable income, it is pretty clear that AGNC continues to haunted by the core earnings issue. That was clear after looking at numerous figures today. Taxable income is the final figure on which the divdiend is paid.
I attribute the success of the offering today to be exactly as RT said. It was successful because of who they chose to underwrite and distribute it. It was also successful because of this ongoing demand for MREIT shares. It was successful because the market opportunities are avaiable.
I don't think a statement that we are still intrepreting was the basis of the success of the offering. In fact, on the day of the statmeent, the shares sold, but then again, that could have been due to the fear of the secondary. I found the statement to be unnecessary, but then again, I spent way to much time and read to much into it.
I should have just bought the calls when it was trading at $28.35. At the time in question, I was posting and wasting time.
Just call me the cave man trader from now on.
Don't be too hard on yourself. AGNC's behind the scenes machinations have got me on high alert as well. Companies that grow too quickly have a history of failure. The quirky nature of the pre-earning info was also a red flag. Although the MREIT model is somewhat unique, any company that triples its market cap in 2 months, deserves scrutiny. That in part was my rationale for stepping farther out to June. Part of the importance of this board is the dialogue between differing points of view. I consider your opinion and "banker's" perspective, very important, as do many of our colleagues on the board. Whether or not we agree 100% with anything that anyone posts, each data point helps to create a more complete picture, and helps to inform our investment decisions. I consider your input invaluable; please keep it coming.
Earnings announcements, 'pre' and otherwise, will give ample evidence of the ability to pay the expected quarterly dividend. Don't beat yourself up over reading into these announcements; we’ve become accustomed to 'parsing' the Fed over the years, after all.
"I believe this statement was issued early in the hopes of limiting the any potential negative impact that concerns about the sustainability of the dividend would have on the secondary."
My feelings exactly, and by the look of today's action, it worked.