American Capital Agency Corp (AGNC) Bounces Back as Dividends Stay Strong

Shares of REIT American Capital Agency Corp (AGNC: Charts, News) bounced back strongly this week, after the company announced that it would maintain its massive dividend of $1.25 per share - a yield of 16% - despite analyst predictions that it would have to cut its dividend in the coming year.

In February 2012, American Capital reduced its dividend by 15 cents, or 10.7%, from the $1.40 per share it had maintained for ten consecutive quarters. Its next dividend payment will come on January 28, 2013 to shareholders on record as of December 27, with an ex-dividend date of December 24. American Capital noted that it would maintain the new $1.25 rate for "the next few quarters," and that the Fed's extension of its low interest rate policy would be favorable for the company, as well as its REIT peers. Daily Chart
American Capital is a mortgage REIT (mREIT), which purchases agency mortgages backed by federal agencies. Mortrage REITs are required by law to pay large dividends to their shareholders, which are taxed as income rather than the lower corporate dividend rate. The company's larger industry peers include Annaly Capital Management (NLY: Charts, News) and Hatteras Financial (HTS: Charts, News), which pay dividend yields of 14% and 11% respectively. Investors who are attracted to the high yields of REITS also use ETFs such as the FTSE NAREIT Mortgage REITs Index ETF (REM: Charts, News) and the Market Vectors Mortgage REIT Income ETF (MORT: Charts, News) for a more diversified basket. On October 29, American Capital reported third quarter earnings of $3.98 per share, or $1.3 billion. The company's net book value increased $3.08 per share to $32.49 per share, which means at $31, the company is trading below its fair value. Over the past twelve months, American Capital's book value increased by $5.59 per share. The company's taxable EPS for the third quarter was $1.36, a decline of 26 cents from the prior year quarter. Its leverage rate also dropped from 7.1x to 7.0x. American Capital's average net interest rate spread during the third quarter was 1.5%, a decline from the previous quarter's 1.62%. Larger interest rate spreads help American Capital generate higher earnings. Therefore, American Capital's investors should be wary of any increases in interest rates, which shrink the net interest rate spread from which the company generates revenue. The only other way American Capital is able to generate revenue is to sell appreciated assets. During the first six months of 2012, the company shifted its portfolio holdings into lower coupon mortgage-backed securities and HARP securities, protecting the company from prepayment risks. This shift in the portfolio also reduces the impact of shrinking net interest rate spreads. The company expects "muted" speed increases in prepayments during the current quarter, despite low mortgage rates and the next round of quantitative easing. The company also authorized a repurchase of $500 million in outstanding shares through the end of the year. This is a welcome contrast to the share-diluting secondary offerings American Capital was known for over the past three years. The company's management stated that it would only repurchase shares when shares were trading "at a discount to book value," which guarantees profitability in the long run. Analysts believe that any fiscal cliff resolution, whether it favors the Democrats or Republicans, is likely to boost AGNC's stock price, as long as it does not directly target agency-backed mortgage securities - the company's bread and butter. However, significant increases to capital gains taxes could make its large dividend look less appealing to income invest ors. The stock trades at 12.5 times earnings, but the book value, which is currently below 1.0, is more important for mREITs like American Capital. Other News About AGNC American Capital Agency Maintains a $1.25 Dividend for the Fourth Quarter American Capital stays at the head of the pack with a 16% yield. Best mREITs For 2013 Are these high yielders safe for an uncertain 2013? Other Stocks in the News Apple Is On Morgan Stanley's Best Idea List For 2013 Apple remains a top institutional pick despite recent volatility. Sprint Reaches Deal to Buy Out Clearwire Sprint takes over Clearwire, but is it too little, too late? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Dec 18, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

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