For those following trends in the MREITs, I was totally taken back by the annualised interest spread of 2.58%, an increase from $2.12% for Q3. NLY in contrast reported a decrease in the net interest spread. This stock is moving up tomorrow. This is huge, knocked the cover off the ball, and I am holding 60 ITM calls. Strike 25's for June. I am not letting this go, and I don't think there is another stock offering coming. Maybe, we even see $31, but that might take awhile. The spread is very convincing when you compare it with the decrease in the NLY's spread from 2.11% to 1.96% on like for like basis. I am still a bit confused about the reporting for NLY's spread, because another figure was 1.85%.
I agree with there are other factors at play here.
It looked like you were denying the upward trend in the post I responded to while now you're offering alternative explanations for it. So I'm not sure what point your making.
If all you're doing is arguing over the "why", than this discussion is a waste of time. It's a combination of things rather than a case of one vs the other. You can attribute it to whatever you like but you'll never be able to prove you are correct.
Of all the factors I'd say the secondaries had the least impact. The trend is upward and its been seen every where but the top of the trading range. Anything beyond that is opinion. And you know what they say about those.
I've noticed the dips are getting smaller. I attribute that to the market's getting more used to the way this company behaves following offerings and dividends. We are discounting the market price less when those occur.
There is also a slight uptrend in the top-line. That also can be attributed to investor confidence. But it's nothing like what we'd see if this company were allowed to reinvest dividends instead of paying 90% to shareholders.
At the moment, because the manual control of federal lending creates a big, artificial gap between borrowing interest and interest paid on purchased mortgages*, this company's business model is, almost literally, a license to print money.
* - Rates aren't coming down because there's actually quite a bit of activity in the mortgage market. Home prices are depressed by the sale of foreclosed and abandoned properties, so there's no need to discount lending rates to make money move. The activity is generating the paper that Fannie and Freddie are buying then selling to AGNC. Lucky for us, AGNC is doing it right. As far as we know.
"The stock will trend up if the equilibrium changes. The equilibrium level, the bottom of the spikes, and the offering prices will all go up with it. Since it's not going either up or down across several offerings, it's clear that offerings aren't affecting it."
Comparing the July-September dividend cycle with the October-December cycle does indicate an upward trend. The post dividend dip in December was less than similar dips in previous cycles and the average trading price in the cycle was much higher, even though the cycle's high was lower than the high reached in the September dividend run. The price decline following each offering has also decreased. So the floor is rising while the ceiling is staying in place. I don't agree that the offerings are the only reason for this, but the trends are there for everyone to see.
I also don't think we can say another offering is coming just because the price goes above $29.50. To paraphrase Peter Lynch "I don't believe the sun rises in the morning just because the rooster crows". The mbs market will determine when its a good time for AGNC to invest additional funds, not the movement of its share price.
I've been in AGNC for over a year and have no plans to sell, so I don't really care if they do another SPO so long as they put the funds to good use. They have a great track record for doing so. These past earnings kicked @ss, I don't care who you are.
If there were no more offerings, the price would stop fluctuating and it wouldn't start to rise long-term.
With offerings, the price fluctuates but it doesn't rise long-term.
Offerings therefore do not cause a long-term rise. Nor, clearly, are they causing long-term drops.
I accounted for the fluctuation, which would be smaller if management would realize they don't have to discount the price so much to sell the offering. Simple arbitrage would sell the offering over a few days if they priced it a few pennies under market value.
Now, you might argue that the yield is high enough that without the issuance of more shares the share price would rise to reduce the yield to a market-average yield. But that should be happening regardless of issuance of shares, since the company is using the offering proceeds to buy more income to pay as dividends. If yield arbitrage were a force here, it'd be returning to market-average yield between dividends and between offerings. But it isn't. It returns to a fairly consistent share price at a fairly consistent yield, and levels off even without any announcements.
There's an equilibrium here, and the market has found it. It's likely a discounting of the likelihood of a loss of new business when spreads drop, as everyone expects will happen if the economy ever gets seriously warm.
As for "investors are rightfully weary of paying more than $30 for a stock if they think a secondary could take them down to $28.50 in the near term" that presumes that the offering has to be 28.50. It could be 38.50 if the stock were at 40 when the offering is announced. Nothing to be wary about. The underwriters will negotiate based on their commission, not based on numerology.
A dividend will cause a spike downward in a shareholder's portfolio balanced by a spike upward in his cash account. An offering will cause a spike downward in a shareholder's portfolio balanced by a return to equilibrium shortly thereafter. Issuing 10% more shares at 95% of the price won't make all 110% of the shares stick to 95% of the price. Especially since the book value accorded to those shares didn't change.
The stock will trend up if the equilibrium changes. The equilibrium level, the bottom of the spikes, and the offering prices will all go up with it. Since it's not going either up or down across several offerings, it's clear that offerings aren't affecting it.
The secondaries are not neutral to share price in either the short or long run. Short term, they force prices down. Long term, they would support share price appreciation by increasing book value and possibly increasing the spread (depending on rates when they put the new capital into play).
The reason we're stuck in this trading range is because management is artificially holding the price down over the short term by issuing shares every time the pps approaches certain levels. I don't see how anyone can acknowledge the short term "fluctuations" this causes and still deny a causal relationship. The offerings force the pps down in the short term, its that simple imo.
AGNC is undervalued compared to its peers. Its no coincidence it has been upgraded several times with price targets well above $30 recently. The metrics all support a much higher price level.
The entire industry distributes 90% of earnings, that's not a factor unique to AGNC so it doesn't explain why AGNC is undervalued relative to other companies playing by the same rules. Part of the reason for the undervaluation is the fact the core earnings have yet to cover the dividend, which makes the dividend "less reliable" in the eyes of some analysts and investors.
Another part is that management has effectively capped the pps with its offerings. Investors are rightfully weary of paying more than $30 for a stock if they think a secondary could take them down to $28.50 in the near term. Just look at how many ppl on this board cite offerings as "opportunities" - they've got no reason to buy right now when they can wait for a secondary to give them a better entry point later on. I have done this myself, not only on AGNC, but within the entire mReit sector.
I don't think its a stretch to say we should be over $30 when the numbers support a higher price level, and I don't think its a stretch to say the secondaries play a role in keeping us below $30 when every time the pps builds momentum and looks to cross over $30, we get a secondary that knocks the price back at least $1.
I'm not looking for a petty message board tussle, so I'm making this my last post on this topic. The earnings were fantastic & I'd love to see us go over $30. My whole point is that management has to allow that to happen.
To each his own, I guess.
I'm saying there's not the causal link you seem to see.
It's not the offerings that keep this stock level. It's the dividend. The size of the dividend relative to the stock price keeps the stock up, but the size of the dividend relative to company profit keeps the stock down.
Since the offerings are accretive to book they're neutral to price, but they do cause the whiplashing in the price, without which the price would probably be in a very narrow range except for spikes up and down when dividends are announced. And those would go away if the dividend were set for the year and paid monthly.
The fluctuations due to offerings occur because the offer is made at a big discount. Something I think management needs to be less generous with. The people getting allocations are getting a discount to the share price that's pretty much guaranteed to be repaid, and they're getting a better yield at the same dividend. If I wasn an underwriter I'd charge admission to get an account with a possibility of an allocation.
One thing I've noticed is that the fluctuations are decreasing in size. Whether this is due to the increased float or because more people see it coming, I don't know.
My timing isn't perfect, however I make considerably more trading than holding for the div.
I average 52% in returns with AGNC. I don't always sell at the top, but I usually buy at the bottom.
i know the stock will be rangebound, because there is no impetus for equity to rise. the company does not retain profits, it pays them to shareholders. there is also no impetus for equity to fall. share price can fall if there is an offering, but that's a temporary situation caused by the artificial price set to lure the new investors. once the offering is over and the accounting shows the company is still strong, the stock will be restored to its original level. i will have my stock, i will have my dividend, and the company treasury will be 8% bigger. the stock will still be rangebound, the dividends will continue, and as long as there is low-hanging fruit to be picked, offerings will be repeated.
it's not a screwing when it's built into your model. your method implies you know how to time it. good luck with that.
I'm still holding the June 27's I bought on the last offering. I was underwater until today, now I should be up tomorrow.
My only concern is crossing over the dreaded $29.50 mark and management's temptation to do another offering. I don't think we'll see another offering, but I can't say I'd be surprised by one, either. They've kept us range bound for almost 6 months now.
So I agree the spread should push this up, I just don't know how far...
I personally think, and I have now been wrong many times, that it woudl just be ridculous for AGNC to go after another offering at least this quarter. It is just based on common sense and shareholder relations. It is okay for us traders, but for the average Jo, well it's hard to take over and over. Still, I doing very well and could sell out tomorrow at my target price of $29.50. I have the June 25's, but then again, I may just ride all of the way.
Great report here, for sure, but NLY's spread was depressed by the fact that drop income doesn't flow through interest income until the securities are settled, thus the company's short term focus on drop depressed spread, which will rebound naturally.
Some questions...Where does this so called "drop income" show up in cash flow? The current value of the forward settling security should simply show up in BV, and if it is higher than what they paid it should boost BV like an unrealized m2m gain on a MBS. Then economic return would be readily comparable between different mREITS. I don't understand why some mREITS try to make it sound like income. "drop income" is a misnomer IMO, can you shed some light on this please?