I think that the greater overriding issue regarding the buybacks of NLY, CMO, and, now, AGNC is the fact that these companies would rather invest in their own stock vs. buying revenue producing mortgages. This is the first time that we have seen this in the last few years, and I believe that it signals a major warning regarding future earnings potential. The December Ex-dividend could be the last $1.25 dividend that you see from AGNC for awhile. If they cannot generate spread income, sooner or later the dividend has to come down to a level that they can sustain at the current earnings rate (which isn't much now).
This company is a great company with outstanding management, but the management can only do so much with what it is dealt. The FED rules, and there is nothing that AGNC can do about it. I hate to say it but, AGNC could be a major short opportunity following Ex-Div in December. Moreover, if we see that interest rates start to tick up, BV for this company could melt away like a Fudgsicle on a hot cement stoop.
OTHER COMPREHENSIVE INCOME
During the quarter, the Company recorded other comprehensive income of $1.2 billion, or $3.73 per common share, comprised of $1.2 billion of net unrealized gains on agency securities and $51 million of net unrealized gains on interest rate swaps. The net unrealized gains on interest rate swaps consists of amortization of the deferred loss that is reclassified into interest expense for interest rate swaps that were de-designated as hedges in the third quarter of 2011.
That's a whopping 2x last quarter and 5-8x previous quarters.
Sounds good. But without leveraging back up, they'll have to realize chunks of that current unrealized gain by selling off mbs to keep balance with declining core income. As they sell off mbs it reduces the earning power of the portfolio and requires them to sell more mbs to cover the further falling core income and so on. Until the spreads start returning all that's out there is low rate, low spread product. Leveraging back up and purchasing that would be less than helpful to shareholders, it would kill the remaining portfolio rate and be next to impossible to unload. I think the mREITs are realizing this and that's why they are issuing share buy backs as a hedge.
So now they have to ride that fine line between core earnings, realized gains, the dividend, and the product they buy to produce income. They are praying mbs increases in value faster than core earnings decline due to spread and portfolio reduction until conditions return to make a SPO attainable.
One last thought Olee, remember AGNC had significant undistributed taxable income when they were paying 1.40 and cut the dividend anyway. Some expected a special dividend and got a surprise indeed. It's all about core income in the end. Be careful my friend.