Seeking Alpha
Long-term horizon, dividend investing, mREITs, BDCs
Profile| Send Message|
( followers)  

The focus of this article (after a company background discussion) is to provide a detailed analysis with supporting documentation (via tables) on the dividend sustainability of the following company: American Capital Agency Corp. (NASDAQ:AGNC). I am writing this particular article due to the high demand that such an analysis be performed. Understanding the tax/dividend payout characteristics of this company will provide investors with an overall better understanding of the mortgage real estate investment trust (MREIT) sector as a whole.

Due to the fact that AGNC currently produces an annual dividend yield of over 15%, many investors turn to this stock (including other stocks within the MREIT sector) for income-producing equity investments. From reading this article, investors will better understand how a company comes up with their current dividend rate and specific signs when an impending dividend raise or cut will eventually be implemented. I will be performing three dividend sustainability calculations within this article. At the end of this article, there will be a conclusion on my opinion about the overall dividend sustainability of AGNC.

General Overview of AGNC:

AGNC is classified as a MREIT which earns a majority of their income from investing, through leverage, in agency mortgage-backed securities (MBSs). These investments consist of residential mortgage pass-through securities and collateralized mortgage obligations (CMOs) for which the principal and interest payments are guaranteed by government-sponsored entities (GSEs). A few examples of GSEs are: 1) the Federal National Mortgage Association (Fannie Mae); 2) the Federal Home Loan Mortgage Corporation (Freddie Mac); and 3) the Government National Mortgage Association (Ginnie Mae). AGNC also occasionally invests in agency debenture securities issued by Fannie Mae, Freddie Mac, or the Federal Home Loan Bank (OTCQB:FHLB). For simplicity, agency debenture securities are also generally referred to as "agency mortgage-backed securities" (MBSs).

One of the main goals for AGNC is to preserve their book value ('BV') while yielding attractive risk-adjusted returns which ultimately are distributed to their stockholders. This occurs through quarterly dividends from the following accounts: 1) net interest income; 2) net realized gains on MBS investments; and 3) various gains from derivative/hedging strategies. AGNC funds their activities mainly through short-term borrowings structured as repurchase agreements (repo loans) which they enter into with a number of major investment banks.

Discussion of AGNC's REIT Classification:

There are numerous REIT provisions that AGNC must adhere to. However, for the purposes of this article, we will focus on one specific provision. Currently, AGNC qualifies to be taxed as a real estate investment trust [REIT] under the internal revenue code. As such, AGNC is required to distribute at least 90% of their REIT taxable income. AGNC will not be subject to federal or state corporate taxes on their REIT taxable income if they distribute all (100%) of their annual REIT taxable income to stockholders. AGNC is allowed to treat dividends declared by September 15th and paid by December 31st of a given year as having been a distribution of their REIT taxable income for the prior tax year. This is basically AGNC's "paid-in-arrears" provision (AGNC uses the term "spill-back" provision). This is an important concept to understand and will be discussed later in this article.

Side Note: Furthermore, if AGNC fails to distribute in each calendar year at least the sum of all the following: a) 85% of their REIT taxable income in a given year; b) 95% of their REIT capital gains net income in a given year; and c) any (100%) undistributed taxable income from prior periods ("paid-in-arrears" provision), AGNC is subject to a non-deductible 4% excise tax on the excess of the required distributions over the sum of the amounts that they actually distributed. For sheer simplicity, this article's analysis is only focusing on the "90% of their REIT taxable income" provision mentioned in the paragraph above. AGNC bases their dividend sustainability on this specific provision, not the more complicated provisions mentioned in this paragraph. That analysis is AGNC's accrual for excise tax. The accrual for that tax is a different topic. Therefore, it will not be mentioned again within this article. I only mention it briefly in this article for reader's knowledge/curiosity.

My Past Articles in Relation to AGNC:

In my first article, I projected/analyzed AGNC's Q1 2013 income statement in detail, including showing actual past quarterly data. Some of this actual past quarterly data from AGNC's income statement is used within this article. In my second article, I projected/analyzed AGNC's Q1 2013 book value ('BV'), again showing actual past data. Some of this actual past data from AGNC's book value calculation is used within tables for this analysis as well. These two articles set the foundation for establishing figures used within the two tables that will be shown below (Tables 1 + 2). The links to those articles are:

AGNC's Q1 2013 Income Statement Article

AGNC's Q1 2013 Book Value Article.

Table 1 - Overview of Accounts: [See Table 1 Below; Red References "A" Through "F2" Next to the 3 Months Ended: 12/31/2012 Column]

Table 1

(click to enlarge)

Before we begin AGNC's dividend sustainability analysis, let us first get accustomed to the information provided in Table 1. Table 1 begins with calculating AGNC's quarterly estimated REIT taxable income from their most recently filed quarter (Q4 2012) and goes back to their first quarter in 2011 (Q1 2011). This is when I initially began taking an interest in AGNC and started with my personal research on the company. All account figures in Table 1 are for the "three-month" time-frame. The quarterly figures in regards to the red references "A" through "C2" are derived from AGNC's quarterly shareholder presentation slide named "Reconciliation of Generally Accepted Accounting Principles [GAAP] Net Income to Estimated Taxable Income."

Table 1 then shows two separate, but indirectly linked, dividend sustainability calculations. These specific calculations will be discussed later on in the article. For now, I am just describing what the accounts in Table 1 mean and where the information is derived. AGNC does not provide a table that shows any dividend sustainability analysis (red references "D" through "F2"). Therefore, the table in regards to red references "D" through "F2" is created by my own research. All figures are checked and tied back to various spreadsheets and data from AGNC's presentation slides and/or quarterly submissions to the SEC.

Let us now take a look at Table 1's accounts (in corresponding order) and briefly describe what these accounts mean and where the information comes from.

A) Net Income:

The quarterly net income figures are derived from AGNC's quarterly 10-Q or 10-K submissions. In an article I previously wrote in regards to AGNC's income statement (see link provided above), I explained in great detail how their net income figure was calculated in any given quarter. Further discussion of these quarterly net income figures will not occur in this article. This article's focus is a dividend sustainability analysis. As stated, please see my AGNC IS article for a deeper discussion of how their net income figures were obtained.

B) Book to Tax Differences (Reversals):

In order for AGNC to come up with a proper estimated REIT taxable income figure, there are specific GAAP (book) to internal revenue code ('tax') adjustments/reversals that need to take place each quarter. Income and expense recognition of certain accounting transactions differ between GAAP (book) and the internal revenue code.

Temporary differences between book and tax accounting transactions can arise for AGNC at or near the end of a given quarter. For example, let us say there is a sale of an MBS between AGNC and a counterparty near the end of the quarter. GAAP recognizes this sale when an agreement is signed by both parties and perhaps a receivable is set up prior to the quarter-ending date. Therefore, we will say no cash actually was received by AGNC from this sale prior to the quarter-ending date. Per GAAP, revenue will be recognized and recorded prior to the quarter-ending date because a deal was struck and the likelihood of receiving proceeds from this sale is high. The revenue from the sale is recorded, and a receivable is set up. However, under the cash method of accounting, the sale of this MBS would not be recognized until the cash was actually received. Therefore, for tax purposes, all accounting for this sale does not occur until after the quarter-ending date.

Permanent differences arise with regards to GAAP accounts like premium amortization, net. This is a noncash GAAP account that is expensed over the estimated life of the MBS. For tax purposes, this account does not exist because it is a noncash account and needs to be reversed out each quarter. There are other, more-detailed timing differences, but for the purposes of this article, further discussion is unwarranted.

C) Estimated REIT Taxable Income - Common Shareholders:

After adding back (or subtracting out) AGNC's book-to-tax differences from net income, one can now calculate AGNC's estimated REIT taxable income. Once this figure is known, you subtract out AGNC's quarterly dividend distribution amount in regards to their preferred shares. Once this is complete, the estimated REIT taxable income for common shareholders figure is known. This is one of the main figures AGNC bases their current and future dividend rate determinations upon and will be used within each dividend sustainability analysis. Also, as was discussed earlier in this article, AGNC is required to distribute at least 90% of their previous year's REIT taxable income in the current year to continue to be classified as a REIT per the internal revenue code. These distributions must be declared by September 15th and paid out by December 31st of a given year. This will be calculated and discussed in the third dividend sustainability analysis later in this article.

D) Distributions to Stockholders from Estimated REIT Taxable Income:

These figures are the actual quarterly dividend accrual AGNC makes in regards to their outstanding common shares. This accrual is made in the current quarter and paid the following month. AGNC does not provide this quarterly distributions figure directly, but through research and analysis, one can find out these amounts. My previous article on AGNC's BV (see link above) represents the figures within this account. All quarterly distribution figures are reconciled and tied back to AGNC's quarterly 10-Q or 10-K submissions or investor presentation slides.

E) Under (Over) payment of Estimated REIT Taxable Income:

These figures are the estimated under (over) payment of AGNC's quarterly estimated REIT taxable income vs. quarterly distributions to outstanding common stock shareholders (Reference "C" minus "D"). I also include what percentage of estimated REIT taxable income is paid out in a given quarter for additional clarity. This calculation will be discussed further under the first dividend sustainability analysis. Once again, AGNC does not provide this specific information, but through research and analysis, one can perform this analysis.

F) Undistributed Taxable Income ('UTI'):

UTI is the cumulative amount of undistributed estimated REIT taxable income on AGNC's books that remains after AGNC accrues for their quarterly dividend distribution. This is always a "running" balance. This is basically AGNC's cumulative surplus in regards to their estimated REIT taxable income that has yet to be paid out. This calculation will be discussed further under the second dividend sustainability analysis.

Now that there is a better understanding of what accounts make up Table 1, let us begin to discuss the results from my dividend sustainability analysis. For a complete and thorough analysis, I have performed three different dividend sustainability calculations. The first two calculations involve Table 1. The third calculation involves Table 2. Table 2's calculation will be discussed under the third dividend sustainability analysis later in the article. The three dividend sustainability calculations are as follows:

1) Quarterly Estimated REIT Taxable Income - Common Shareholders vs. Quarterly Distributions Analysis:

2) UTI Cumulative Balance (Quarterly) vs. Quarterly Distributions Analysis:

3) "Paid-In-Arrears / Spill-Back" Provision Analysis:

1) Quarterly Estimated REIT Taxable Income - Common Shareholders vs. Quarterly Distributions Analysis: [See Table 1 Above; Red References "D" Through "E" Next to the 3 Months Ended: 12/31/2012 Column]

This is the simplest of the three dividend sustainability calculations to perform. For this analysis, I take AGNC's quarterly "estimated REIT taxable income - common shareholders" (red reference "C2" in Table 1) amount and subtract this figure by the quarterly "distributions to stockholders from estimated REIT taxable income" (red reference "D" in Table 1) amount. If AGNC's reference "C2" is greater than reference "D", then AGNC has ample quarterly REIT taxable income to pay out their quarterly distributions to common stockholders. After performing this specific analysis, I conclude AGNC has consistently had ample quarterly REIT taxable income to pay their quarterly common stock dividend. I will now explain why.

In only the following quarters did AGNC pay an amount over 90% of their quarterly estimated REIT taxable income: 1) Q2 2012; 2) Q4 2011; and 3) Q1 2011. Furthermore, AGNC has never paid out 100% of their estimated REIT taxable income in a given quarter. This is a very positive sign. I have done this analysis many times in the past. AGNC's results in regards to this specific calculation are one of the best I have seen when compared to other companies. In Q1 2012, after AGNC's dividend rate cut from $1.40 to $1.25 per share, they only paid a measly 58% of their quarterly estimated REIT taxable income in dividends. This dividend cut was anticipatory for a modest gradual decrease in overall market interest rates in 2012. This cut may not have been necessary. As we will see during our third calculation later, this boosts good news for a couple of future quarterly dividends coming up soon. Also, just in this past quarter (Q4 2012), AGNC only paid 65% on their estimated REIT taxable income. This 65% payout percentage of estimated REIT taxable income for Q4 2012 is even without a dividend cut. This is another very positive sign for the future sustainability of the dividend.

This first analysis shows AGNC has easily covered their quarterly distributions from their quarter's estimated REIT taxable income. This statement is backed up by the fact that AGNC's UTI cumulative balance has grown every single quarter as shown in Table 1 (Q1 2011 -Q4 2012).

However, this specific analysis alone does come with certain drawbacks. This is why it is only the first of three calculations that will be performed for AGNC. This analysis does not take into consider any UTI data or data in regards to the "paid-in-arrears / spill-back" provision that must be adhered to by AGNC. Since this first dividend sustainability analysis disregards these notions, it would only be prudent to perform additional calculations in regards to AGNC's UTI account (second calculation) and also include their 90% of previous year's REIT taxable income "paid-in-arrears" provision (third calculation).

Now let us go on to the next dividend sustainability analysis which is a little more complicated analysis to perform. We need to perform this next analysis to gain even more support/clarity on AGNC's dividend sustainability.

2) UTI Cumulative Balance (Quarterly) vs. Quarterly Distributions Analysis: [See Table 1 Above; Red References "D", "F1", and "F2" Next to the 3 Months Ended: 12/31/2012 Column]

For this analysis, I take AGNC's "UTI balance" (red reference "F2" in Table 1) and divide this figure by the quarterly "distributions to stockholders from estimated REIT taxable income" (red reference "D" in Table 1) amount. From this calculation, AGNC's "UTI coverage of current dividend distributions" (red reference "F2 / D" in Table 1) ratio is achieved. This can also be referred to as AGNC's UTI per share amount. The higher this ratio (or per share amount) gets, the more positive the results. This is basically the UTI cumulative balance amount covering the current quarter's dividend distribution amount. This amount is the excess reserve AGNC has if their estimated REIT taxable income falls under their current $1.25 per share amount ($1.40 per share prior to Q1 2012; since Q3 2009) in any given quarter. If one reviews this ratio within Table 1, you can see this ratio increasing in most quarters. There are a few quarters where the ratio drops slightly. However, eventually the ratio rises even higher in the subsequent quarters. In Q1 2011, the UTI to quarterly dividend distributions ratio was only 0.40. However, if you look at the subsequent quarters, this ratio gradually increases. AGNC currently has their highest undistributed taxable income ('UTI') balance of $749 million at 12/31/2012. Their quarterly distributions for Q4 2012 were only $427 million. Table 1 shows why this balance has consistently increased. For AGNC's last reported quarter (Q4 2012), this ratio has grown to 1.76. As was the case in the first dividend sustainability analysis, this increasing ratio is yet another very positive sign for AGNC.

However, this specific analysis does have one drawback. This second calculation does not include specific consideration for the 90% REIT taxable income "paid-in-arrears / spill-back" provision that must be adhered to by AGNC. Since both the first and second dividend sustainability analysis disregards this notion, it would only be prudent to perform one last dividend sustainability analysis including this regulation.

For my third and final analysis, we will include the 90% of previous year's REIT taxable income "paid-in-arrears / spill-back" provision to see how this might affect AGNC's future dividend sustainability for 2013.

3) "Paid-In-Arrears / Spill-Back" Provision Analysis: [See Table 2 Below; Red References "C2", "G" Through "J" Next to the 3 Months Ended: 12/31/2012 Column]

This final analysis transitions from what AGNC has done in the past in regards to their dividend payout amounts/percentages/ratios to an analysis of AGNC's 2013 dividend rate sustainability. As was discussed earlier in this article (under "discussion of AGNC's REIT classification"), AGNC is required to distribute at least 90% of their previous year's REIT taxable income in the current year to continue to be classified as a REIT per the internal revenue code. These distributions must be declared by September 15th and paid out by December 31st of a given year. This is referred to as the "paid-in-arrears / spill-back" provision. In my opinion, this is the most important calculation because AGNC must adhere to this provision or else be de-classified as a REIT company per the internal revenue code.

All account figures in Table 2 (see below) are for the "twelve-month" time-frame. The annual figures in regards to the red references "A" through "C2" are derived from AGNC's quarterly shareholder presentation slide named "Reconciliation of Generally Accepted Accounting Principles (GAAP) Net Income to Estimated Taxable Income." AGNC does not provide a table that shows any dividend sustainability analysis (red references "D" through "J"). Therefore, the table in regards to red references "D" through "J" is created by my own research. All figures are checked and tied back to various spreadsheets and data from AGNC's presentation slides and/or quarterly submissions to the SEC.

Let us take a look at Table 2 and calculate the amounts of distributions that must be declared by 9/15/2013 in order to satisfy AGNC's requirement of maintaining their REIT status:

Table 2

(click to enlarge)

Per our earlier quarterly analysis, we now can figure out AGNC's 2012 annual REIT taxable income. This amount is $2.089 billion. This amount is the figure (within Table 2) that is shaded in pink next to the red reference "C2" for the 12 months ended 12/31/2012 column. 90% of AGNC's 2012 annual REIT taxable income is $1.88 billion. This amount is the figure (within Table 2) that is shaded in black next to the red reference "C2 * 90% = G" for the 12 months ended 12/31/2012 column. This $1.88 billion needs to be declared by 9/15/2013 and paid out to common shareholders by 12/31/2013. From this calculation shown within Table 2, we now know the minimum amount of dividend distributions that need to be declared by 9/15/2013 and paid out by 12/31/2013.

In past years, AGNC has declared Q3 dividends on the following dates: 1) 2010's Q3 dividend on 9/14/2010; 2) 2011's Q3 dividend on 9/13/2011; and 3) 2012's dividend on 9/11/2012. Declaring these Q3 dividends on these dates is no coincidence. They declare their Q3 dividend just days before the deadline of September 15th of a given year. I mention this because from this evidence, we can be pretty confident that AGNC will issue their Q1-Q3 2013 dividends prior to September 15th, 2013. You also must include the Q4 2012 dividend that was declared on 12/24/2012 but paid out on 1/28/2013. This dividend is treated as having been a distribution of AGNC's 2012 REIT taxable income and paid in 2013. Therefore, the four quarter's worth of dividends must equal at least 90% of AGNC's 2012 annual REIT taxable income which is $1.88 billion.

From my previously written article on AGNC's Q1 2013 estimated book value, we can be pretty confident AGNC accrued a Q1 2013 dividend of approximately $499 million. In Q4 2012, they accrued a dividend of approximately $427 million. Therefore, AGNC has distributed approximately $926 million of their 2012 annual REIT taxable income in 2013 so far. This amount is the figure (within Table 2) shaded in blue next to the red reference "H" for the 12 months ended 12/31/2012 column. Therefore, at a minimum, AGNC must distribute an additional $953 million of their 2012 annual REIT taxable income. This amount is the figure (within Table 2) shaded in yellow next to the red reference "(G - H) = J" for the 12 months ended 12/31/2012 column. The remaining balance's average dividend payable (Q2 + Q3 2013) would have to be at least $476 million. This amount is the figure (within Table 2) shaded in yellow next to the red reference "(J / 2)" for the 12 months ended 12/31/2012 column.

Two scenarios could arise which would affect how AGNC distributes the remaining $953 million left in their 2012 annual REIT taxable income (hence a possible dividend rate change). One scenario involves an additional equity offering between now and September 2013. I personally see one more equity offering occurring between now and 9/15/2013. AGNC just completed a sizable equity offering in late February / early March. If AGNC had an additional equity offering, this would in turn increase the number of common shares outstanding, thus potentially affecting their current dividend of $1.25 per share.

This happens because there are more shares outstanding, hence a higher quarterly dividend distribution amount occurs if the dividend rate stays the same at $1.25 per share. AGNC, purely from a "distribute at a minimum 90% of their previous year's REIT taxable income in the current year" perspective, might have the option to only pay the minimum remaining balance of $953 million over the two quarters. As stated above, this comes out to be an average remaining balance of $476 million for Q2 + Q3 2013. Taking into consideration the recent equity offering in late February / early March, AGNC paid out dividend distributions of approximately $499 million in Q1 2013. This is $22 million over the remaining average balance's dividend payable figure (Q2 + Q3 2013) of $476 million.

However, I see AGNC just paying out the minimum 90% of their 2012 annual REIT taxable income as a very low possibility. In both 2011 and 2012, AGNC distributed an annual amount in excess of the prior year's annual REIT taxable income. In 2011, AGNC had to pay out (at the minimum 90%) $222 million in regards to their 2010 annual REIT taxable income. This amount is the figure (within Table 2) that is shaded in black next to the red reference "C2 * 90% = G" for the 12 months ended 12/31/2010 column. However, they paid out $664 million from Q4 2010 through Q3 2011. This amount is the figure (within Table 2) shaded in light brown next to the red reference "H" for the 12 months ended 12/31/2010 column. This amount is approximately 300% of their 2010 annual REIT taxable income.

In 2012, AGNC had to pay out (at the minimum 90%) $925 million in regards to their 2011 annual REIT taxable income. This amount is the figure (within Table 2) that is shaded in black next to the red reference "C2 * 90% = G" for the 12 months ended 12/31/2011 column. However, they paid out $1.42 billion from Q4 2011 through Q3 2012. This amount is the figure (within Table 2) shaded in light blue next to the red reference "H" for the 12 months ended 12/31/2011 column. This amount is approximately 150% of their 2011 annual REIT taxable income. As you can see, AGNC typically does not just pay the minimum "required" distribution of 90% of the prior year's annual REIT taxable income amount.

The second, more likely, scenario is to maintain their current dividend of $1.25. If AGNC did not have any additional equity offerings in Q2 or Q3 2013, maintaining their dividend at $1.25 per share would make their quarterly distributions be approximately $499 million for Q2 + Q3 2013. This would add up to be a remaining Q2 + Q3 distribution of $998 million. This amount is only $44 million over the $953 million left in their 2012 annual REIT taxable income. Therefore, any dividend cut would basically put their 2013 distributions under the required 90% of their 2012 annual REIT taxable income amount.

Furthermore, AGNC has stated they ultimately want to pay out 100% of their 2012 annual REIT taxable income in 2013. This is due to the fact that AGNC would not pay any federal or state corporate income taxes if they distribute all (100%) of their annual REIT taxable income to stockholders by 9/15/2013. Therefore, at a minimum, AGNC would like to distribute an additional $1.16 billion of their 2012 annual REIT taxable income in Q2 + Q3 of 2013. This amount is the figure (within Table 2) shaded in yellow next to the red reference "(C2 - H) = I" for the 12 months ended 12/31/2012 column. The remaining balance's average dividend payable (Q2 + Q3 2013) would have to be at least $581 million.

This amount is the figure (within Table 2) shaded in yellow next to the red reference "(I / 2)" for the 12 months ended 12/31/2012 column. If AGNC keeps to this strategy of wanting to distribute 100% of their 2012 annual REIT taxable income, assuming there were no additional equity offerings in Q2 or Q3 2013, then the $1.25 quarterly dividend rate would not be sufficient to get their 2013's distributions to this 100% of their 2012 annual REIT taxable income amount. AGNC would fall approximately $164 million ([$581 million - $499 million] x 2 quarters) short of this goal. Therefore, there could even be a dividend raise that occurs either in Q2 or Q3 2013. Again, this assumes there will be no additional equity offerings. As stated above, I believe there will be an additional equity offering between now and 9/15/2013. Therefore, maintaining the $1.25 per share dividend rate seems the most logical decision.

Conclusions Drawn:

From the three separate dividend sustainability analyses performed, there is clear evidence that AGNC's quarterly dividend is sustainable at the current $1.25 per share amount. I was confident the dividend rate was safe before performing this analysis, but after completing all three calculations, I am even more confident the dividend rate is secure for several quarters to come. Each of the three separate dividend sustainability calculations showed positive signs.

The positive signs are as follows:

1) One positive sign is from the first dividend sustainability analysis performed. AGNC's estimated REIT taxable income has continued to surpass the $1.25 per share dividend rate. In fact, looking back in every quarter since Q1 2011 (possibly longer), AGNC has had an estimated REIT taxable income per share figure above the $1.25 dividend rate. This is a very encouraging sign. In other words, the quarterly estimated REIT taxable income dollar amount has been in excess of the dollar amount of quarterly dividend distributions. This conclusion came about from the "quarterly estimated REIT taxable income - common shareholders vs. quarterly distributions analysis".

2) Another positive sign is AGNC's UTI balance continues to rise. This is from the second dividend sustainability analysis performed called "UTI cumulative balance (quarterly) vs. quarterly distributions analysis." Again, this is a very positive sign in regards to dividend sustainability. Some critics may argue that even though the UTI balance is rising, the number of outstanding share is rising and well. Therefore, the increase in UTI is an invalid indicator. This is why I performed the UTI / dividend distribution ratio analysis. Again, AGNC's ratio continued to increase in most quarters. There are a few quarters where the ratio drops slightly. However, eventually the ratio rises even higher in the subsequent quarters. The "UTI coverage of current dividend distributions" ratio of 1.76 is at its highest level ever at 12/31/2012.

3) As noted in our third dividend sustainability analysis, 90% of AGNC's 2012 annual REIT taxable income is $1.88 billion. This is a rather large figure that they must be declared by 9/15/2013. AGNC has distributed approximately $926 million of their 2012 annual REIT taxable income in 2013 so far (Q4 2012's + Q1 2013's dividend). This leaves $953 million of their 2012 annual REIT taxable income in 2013 to be paid out in Q2 + Q3. Regardless of whether AGNC simply wants to only pay out 90% of their 2012 annual REIT taxable income (required) or pay out all (100%) of their 2012 annual REIT income (AGNC stated this was their goal and has done so in every year since inception), maintaining the $1.25 dividend is the most logical choice. Cutting the dividend these next 2 quarters basically can't happen unless there's a massive equity offering that occurs between now and 9/15/2013. Even if an equity offering occurs, the probability of a dividend cut is still low. If there are no equity offerings from now till 9/15/2013, there's a good possibility of a slight dividend increase to comply with AGNC's goal of distributing 100% of their 2012 annual REIT taxable income. This conclusion came about from the "'paid-in-arrears / spill-back' provision analysis."

Conclusion:

Therefore, in regards to this detailed dividend sustainability analysis, I am confident AGNC will keep their $1.25 per share quarterly dividend. In regards to any possible dividend rate changes in the future, all the evidence points to a dividend increase as opposed to a dividend cut. AGNC has been very cautious in regards to choosing a quarterly dividend rate. I believe the Q1 2012 cut from $1.40 to $1.25 per share was precautionary in nature. From the three dividend sustainability calculations performed within this article, AGNC's $1.25 per share is easily covered by AGNC's operations. Furthermore, keeping this $1.25 per share dividend rate for the remaining 2013 quarters barely surpasses the minimum REIT requirement of distributing 90% of their 2012 annual REIT taxable income.

Final Note: If upon "clicking" the tables in this article one cannot fully see the entire table, I suggest you right click the table(s) and "Save As" to your computer.

Side Note: As will be evidenced in my next dividend sustainability article, there is a company within the BDC sector that has a much different outcome when performing this analysis. The initial results are very interesting.

Source: American Capital Agency Corp.'s Detailed Dividend Sustainability Analysis