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American Capital Agency Beats Estimates

Zacks Equity Research

Mortgage real estate investment trust (commonly known as mREIT) – American Capital Agency Corp. (AGNC) – reported encouraging first-quarter 2014 results with its adjusted net spread income per share of 71 cents (excluding "catch-up" premium amortization), comfortably exceeding the Zacks Consensus Estimate of 68 cents.

Results also compared favorably with the prior-quarter figure of 67 cents per share. The company’s concerted efforts toward portfolio repositioning and shrinking its capital base by share repurchases helped it to post encouraging results this quarter.

American Capital Agency reported net interest income of $291 million in the quarter under review, reflecting a decline from the prior-quarter figure of $422 million as well as the Zacks Consensus Estimate of $327 million.

Behind the Headline Numbers

American Capital Agency reported a 5.1% economic return on common equity for the quarter, or 20.5% annualized, and this comprised 65 cents dividend per share and 56 cents rise in net book value per common share. As of Mar 31, 2014, the company’s net book value per share was $24.49, reflecting a 2.3% rise from $23.93 per share as of Dec 31, 2013.

As of Mar 31, 2014, the company's investment portfolio aggregated $70.5 billion of agency mortgage backed securities (:MBS). This included $14.1 billion of net long TBA (to-be-announced) mortgage positions, at fair value.

The company's adjusted average net spread and dollar roll income for the quarter was 1.59%. This reflected a rise of 17 bps from 1.42% in the prior quarter. During the first quarter, the actual CPR (constant prepayment rates) for the company's investment portfolio was 7%, compared to 8% for the prior quarter.

As of that date, the company had $352 million investment in mortgage REIT equity securities and realized $49 million or 14 cents per share of dividends and gains from it during the quarter. Including the net TBA position, the company's "at risk" leverage ratio as of Mar 31, 2014 was 7.6x, marginally above 7.5x as of Dec 31, 2013. Moreover, as of Mar 31, 2014, American Capital Agency had cash and cash equivalents of $1.7 billion, down from $2.1 billion at the end of the prior quarter.

Dividend Update

On Mar 20, 2014, the company declared a first quarter dividend on its common stock of 65 cents per share, unchanged from the prior quarter. This was paid on Apr 28, 2014 to common stockholders of record as of Mar 31, 2014. As a matter of fact, the company paid a total of $4.4 billion in common dividends, or $28.26 per common share, since its initial public offering in May 2008.

Share Repurchase

In first-quarter 2014, American Capital Agency repurchased approximately 3.4 million shares of its common stock, representing 1% of its outstanding shares as of Dec 31, 2013, at an average price of $22.10 per share, including expenses, and aggregating around $74 million.

With this, around 46.3 million shares have been bought back for approximately $1.0 billion since the beginning of the buyback program in the fourth quarter of 2012. The company further has $1.0 billion remaining available under its current share repurchase authorization through Dec 31, 2014.

In Conclusion

American Capital Agency has taken measures to reposition its portfolio to meet the current interest rate environment. The company is also witnessing a recovery in book value and remains positive on the outlook for agency MBS market.

American Capital Agency currently has a Zacks Rank #3 (Hold). The company is externally managed and advised by American Capital AGNC Management, LLC, an affiliate of American Capital, Ltd. (ACAS).

Investors interested in the mREIT industry may also consider stocks like AG Mortgage Investment Trust, Inc. (MITT) and Cherry Hill Mortgage Investment Corporation (CHMI). Both these stocks carry a Zacks Rank #2 (Buy).

Read the Full Research Report on AGNC
Read the Full Research Report on ACAS
Read the Full Research Report on MITT
Read the Full Research Report on CHMI

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