AGNC Reports Strong 4Q Results

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American Capital Agency Corp. (NasdaqGS:AGNC - News), a real estate investment trust (:REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), reported earnings of $208.7 million or $0.99 per share during fourth quarter 2011, compared with $138.1 million or $2.50 in the year-earlier quarter. The decrease in quarterly earnings per share (:EPS) is primarily due to higher number of weighted average shares in fourth quarter 2011 compared to the prior-year quarter.

Including one-time items, comprehensive income for the reported quarter was $476.8 million or $2.27 per share compared to $68.2 million or $1.23 in the year-ago quarter. Comprehensive income per share for fourth quarter 2011 was well ahead of the Zacks Consensus Estimate of $1.22.

For full year 2011, American Capital Agency reported earnings of $770.5 million or $5.02 per share, compared to $288.1 million or $7.89 in the previous year. The decrease in fiscal EPS is primarily due to higher number of weighted average shares in 2011 compared to the prior year. Comprehensive income for the reported fiscal was $1.1 billion or $7.50 per share compared to $200.3 million or $5.49 in 2010.

The company generated total revenues of $352.9 million during fourth quarter 2011 compared to $101.0 million in the year-ago quarter. Net interest income was $262.8 million for the reported quarter, which was below the Zacks Consensus Estimate of $274 million. For full year 2011, American Capital Agency reported total revenues of $1.1 billion compared to $253.0 million in the year-ago quarter. Net interest income was $824.3 million for 2011 compared to $177.0 million in 2010.

American Capital Agency recorded an annualized economic return of 33% for the quarter. As of December 31, 2011, the company’s investment portfolio comprised $54.7 billion worth of agency securities at fair value, including $51.5 billion of fixed-rate securities, $2.8 billion of adjustable-rate securities and $0.4 billion of CMOs.

About $20.2 billion of the investment portfolio comprised of less than or equal to 15-year fixed-rate securities, $25.6 billion of 30-year fixed-rate securities, $5.7 billion of 20-year fixed-rate securities.

The investment portfolio of American Capital Agency was financed with $47.7 billion of repurchase agreements and other debt, resulting in a leverage ratio of 7.7x. Adjusting for the net payable for agency securities not yet settled, the leverage ratio was 7.9x as of December 31, 2011.

During the reported quarter, the annualized weighted average yield on the company's investment portfolio was 3.06% and its annualized average cost of funds was 1.16%, resulting in a net interest rate spread of 1.90%. At year-end 2011, the weighted average yield on the company's investment portfolio was 3.07% with a weighted average cost of fund of 1.13%, which resulted in a net interest rate spread of 1.94%.

American Capital Agency declared a fourth quarter dividend of $1.40 per share, which equates to a total of $1.3 billion in dividends or $18.86 per share since its initial public offering. The company decreased its first quarter 2012 dividend to $1.25 per share. As of December 31, 2011, the company's net book value per share was $27.71 compared to $26.90 as of September 30, 2011. At year-end 2011, American Capital Agency had cash and cash equivalents of $1.4 billion compared to $173.3 million in 2010.

We maintain our ‘Neutral’ recommendation on American Capital Agency, which currently has a Zacks #4 Rank translating into a short-term ‘Sell’ rating. We also have a ‘Neutral’ recommendation and a Zacks #4 Rank for Anworth Mortgage Asset Corporation (NYSE:ANH - News), a competitor of American Capital Agency.

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