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American Capital Agency: Dividend Monster

By    |   Tuesday, 06 Dec 2011 03:21 PM

American Capital Agency Corp. (AGNC) is a mortgage REIT sporting a current dividend yield of almost 20 percent. When investors spot a stock with that kind of yield, the question is whether the company can sustain such a monster dividend rate.

American Capital Agency Corp. lives up to its name by investing in a portfolio of mortgage securities backed by the agencies Freddie Mac, Fannie Mae and Ginnie Mae. The company has approximately a $40 billion portfolio of securities funded by company capital and borrowed money.

The mortgage REIT model works by borrowing at a lower rate than earned on the mortgage securities, leveraging the interest earned from the securities. By leveraging a portfolio yielding about 3 percent by a factor of eight, AGNC ends up with the ability to pay a 20 percent dividend.

The $1.40 quarterly dividend from AGNC has been in effect since the second quarter of 2009. For the first three quarters of 2011, the company earned the $4.20 per share paid out plus an additional 85 cents per share of undistributed income.

The amount of undistributed income increase by 41 cents in the third quarter. REITs are required to pay out at least 90 percent of net income in the form of shareholder distributions.

Prepayment rates

The financial metrics to watch with a mortgage REIT are the yield on the portfolio minus the yield to borrow for the net spread and the prepayment rates on the mortgage portfolio. In the 2011 third quarter, AGNC earned 3.14 percent on its portfolio with a 1 percent cost of money for a net yield of 2.14 percent. At the end of 2010, the company's net spread was 2.58 percent.

American Capital Agency reports a conditional prepayment rate (CPR) in its portfolio to give an annualized rate of mortgage principal prepayment. For the third quarter the rate was 9 percent, but the company is forecasting a rate of 13 percent going forward.

A higher CPR means the company must amortize bond premium payments and put the repaid principal back to work, not a good thing if mortgage rates stay low.

The fear for mortgage REITs — and the resulting high yields — is that expanded government refinance plans for high rate mortgages will increase CPR and result in lower profits.

Analyst Douglas Harter of Credit Suisse has stated that he believes AGNC is best positioned to absorb any refinancing from these plans.

The company reports next on Feb. 7.

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American Capital Agency Corp. (AGNC) is a mortgage REIT sporting a current dividend yield of almost 20 percent. When investors spot a stock with that kind of yield, the question is whether the company can sustain such a monster dividend rate. American Capital Agency Corp....
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2011-21-06
Tuesday, 06 Dec 2011 03:21 PM
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