* 10% discount to BV, with BV likely to remain fairly stable from here
* Excellent BV protection via highly hedged portfolio, strong Fed bid for current coupon MBS, prepayment protected MBS mix
* Solid and stable cash flows given low CPRs, feeding a huge dividend and low need for reinvestment at currently lower spreads
* Top notch management
* 17% current dividend yield likely cut to a sustainable level around 13-14% in 2013--but still great in today's low rate environment
* Repo rates likely to go lower in 2013 from the currently elevated levels--which would help new money investment spreads
* CPR speeds likely to slow into 2013--likely driving improved sentiment for the group
Sentiment: Strong Buy
Still worth buying here I think...for a run to $33 plus the $4-5 in total dividends this year.
Despite the noise, fiscal cliff and debt ceiling issues should get resolved without any sort of disruption to the debt markets, repo rates have already fallen 10+ bps from 4Q (as expected), and long term rates have backed up a bit while mortgage spreads have tightened (thus CPR speeds should be falling from 4Q levels). This is good for earnings, good for BV, and good for sentiment.
AGNC is a best of breed company that is still worth owning. Nice Xmas opportunity to buy for those that didn't panic.
Sentiment: Strong Buy
Think about the investment opportunity from this perspective: despite the recent decline in the shares the fiscal cliff will have no impact whatsoever on the company's earnings power and will ultimately be seen as a great buying opportunity on both a short and long term basis.
Next 3 months:
Beyond the current volatility there will be some actual financial results released by the company in late January. The results will likely show relative stability in BV and likely improvement in earnings from 3Q as leverage at 7.0X was below optimal and CPRs were relatively well behaved. Thus the current 10+% discount to BV should narrow on these results as well as the realization that the next nice big fat dividend is that much closer to being paid out. The future outlook should indicate lower repo costs and somewhat wider new money spreads that should bolster future earnings and/or stabilize the dividend coverage near at least $1.00 per quarter. Investor confidence in a sustained 13.5% dividend yield should drive the shares higher as well.
$4-5 in dividends annually provide significant downside protection for the stock and attractive overall returns if BV is sustained anywhere near current levels. I don't know if a 10% discount to BV is the bottom, or if it is 15-20%. But the difference we're really talking is only about 1-2 quarters worth of dividends (hence the downside is covered by March-June at worst) vs. 30-40% of total return upside over the next 2 years.
Let's keep things in perspective and enjoy the late xmas present (to buy the stock).
Sentiment: Strong Buy
This wacky market is entering the region in which value is not as important as preserving capital. This means a lot of people selling because they think it is going lower. The lower it goes the better for us, temporarily. Below 27 is a sure bet. So now they can throw as much fear as they want at the mReits and most of us stand by waiting for the buy.
I bought a smattering of puts and strangles yesterday when I heard everybody was headed back to Washington for a week of posturing. But in its wackiness, I did not know if the market would sell or buy on the news. So far so good on the Exxon strangle, Wells fargo, and little known Kronos materials.
An average of $4 in dividends over the next 7 years yields the current stock price. That equates to a a pretty reasonable 12% return on current equity (and a 13+% dividend yield at the current stock price). This management team has also had a great track record growing BV (and protecting it in every interest rate and regulatory environment thus far over the past 4 years). With an 80%+ hedge ratio and a negative duration gap on a MBS book that consists of 70% prepayment protected agencies and 30% current coupon MBS that the Fed is/will be aggressively buying (hence there is capital appreciation potential) investors should be confident that BV will be maintained/increased over time and the dividends are extraordinarily attractive (and provide significant protection against any meaningful decline in the stock).
Sentiment: Strong Buy
I am not sure I would consider a negative gap duration management to be a positive. Since inherent to MBS is negative convexity a small amount of negative gap duration would mitigate the effect of negative convexity. Beyond that anything more would imply an interest rate change hedge. A neutral (zero gap) duration matching would be neutral interest rate change risk__right? A negative gap would be hedged to mitigate rising rates. I think it would be wiser to hedge via financial futures. Those positions can be unwound or reversed more efficiently and timely than a portfolio’s duration gap.
Maybe this offers some reasoning why the market has been pricing AGNC lower. Since the long end of the yield curve has generally been lowered; a negative duration gap means the portfolio liabilities gain more than assets, reducing equity value__hmmn?
Once again I agree with everything you wrote, but the real value of anything is what somebody is willing to pay for it, and recent history indicates buyers show up when there is a 15% or better return. I think AGNC is best of breed and like it very much, but they are in a rough neighborhood and they have done a wonderful job. But, I think we are going to see a div reduction and unless buyers are happy with something less then 15% return, the price has to come down. If somebody sees fault with my logic, please share it with me and the board, I am willing to be schooled.
All good and correct info, how ever recent history shows buyers willing to buy AGNC when it is paying 15-16% dividends. I believe the div will be reduced to $1.00 min and using that you need a pps of $27.00 for a 14.8% div. I believe AGNC is a buy under $27.00.
A couple people didn't like your post...;-) I did. AGNC would be a heck of a buy under 28.00 and I believe you and the MM's are correct in pricing a 1.00 forward dividend. I have been one of the biggest supporters of AGNC and I still am, but the reality of the current situation as far as the macro and micro economic squeeze upon agency rmbs cannot be ignored.
Look for the lows on AGNC to be the week of Jan 14-18th @ culminating @ JanOPEX. Historically, in AGNC's cycle, the first low occurs 13-18 trading days after EX(Jan14-18th), followed by the second low at 30-33(Feb 7th-12th) trading days after EX. I am still looking for a return to BATESAT this quarter. I am loving it!! Look back and check it out...