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American Capital Agency Corp. Message Board

  • oldschoolbuilder oldschoolbuilder Dec 14, 2012 4:52 PM Flag

    Focus on taxable earnings

    AGNC likes to at least partially base its dividend on taxable earnings rather than just net spread income. Taxable earnings include both net spread income and realized gains, which makes sense given AGNC's active portfolio management strategy. For instance, taxable earnings were $1.36 in 3Q vs. estimated spread income of $0.79 (or $0.86 excluding catch-up premium amortization).

    Gary Kain has stated in past calls that "this is not a time to focus on the geography of earnings" and that "AGNC has significant flexibility with respect to the dividend" in that they will likely cut it only when it starts to somewhat meaningfully eat into book value.

    The takeaway for me from today's dividend announcement is that BV has likely held up ok this quarter despite the generally weaker MBS/swaps dynamics since 9/30, and that AGNC took advantage of the volatility in this environment to either trade its portfolio well or opportunistically add to its MBS holdings/increase leverage (when prices cheapened up) so that spread income turned out to be higher.

    In any case, the dividend yield here will likely stay in the 13%+ range for a sustainable period of time and BV will likely hold up reasonably well given the Fed's intention to aggressively purchase current coupon MBS, AGNC's low CPR portfolio, and AGNC's conservative hedging strategy.

    Based on the dividend adjusted price (in the $29+ range), you are getting this at a 10% discount to BV, a great management team, and a 13%+ dividend yield. I'll take it.

    Sentiment: Strong Buy

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    • Well thought out post.

      When book value increased by more than $2/share in one quarter, and the company has spread income of 79 cents, I agree they have flexibility.

      So we're really talking about the non-covered amount between 79 cents and 125 cents, or 46 cents per share here.

      The book value increased more than $2, and we 'ate away' 46 cents of that. This leaves more than enough to call 'growth' in my opinion. Add this to the buy-back and what you get is higher book value so long as the company is buying-back below book, as well as a reduced dividend paid out, leaving more cash.

      I believe this will have a net effect toward the 46 cent spread deficit, and that can be added to our equity per share.

      I've spread out my positions slightly away from agency REITs (picked up a little more non-agency today) but still have roughly 88% of my initial position in agency REITs. It's getting harder and harder for the curve to compress and 15-year REFI percentage has moved the wrong direction since the Fed's move (the right direction for REIT investors).

      I intend to let the dividends pay me out of whatever hole appears in front of us. There might be some cuts in dividends across the REIT sector, but I do not see these being unprofitable as far as the business is concerned.

      The rest comes out if you give it some time.

    • the danger here is that the 1.25 divvy might have sucked up a lot of the "overhang" earnings, which would be detrimental to BV. eg, if they earned 75 cents and still paid 1.25, that would be a 50 cent reduction. another headache is that Fed buying has increased BV by increasing fair value of securities held. all well and good, but it is not cash income unless you sell them. hard to pay out cash when it is all paper.

      i will continue to wait.

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