American Capital Agency Corp. (Nasdaq: AGNC) announced on May 30, 2013, that will carry the vote on the 10-20 million shares of preferred stock forward to the June 28, 2013 meeting. The company charter requires a majority of votes and the company has not received enough votes from stockholders to determine the outcome. The company is soliciting investors to vote. If you wish to vote and have not been contacted by the company, you can contact Georgeson Inc. at 800-676-0194.
There are several upsides to voting yes on this option, for the preferred and common stock holder. Both will benefit over the long term and make a handsome return just as the housing market is improving.
Preferred shares will net the investor about 8 to 8 ½ % return guarantee. The company will have a large surge of capital to invest (between 10 and 20 million dollars) and while the housing market is improving, the ability to invest would provide a solid opportunity to capture an excellent rate of return on the capital.
This return on capital would exceed the 8 ½ % planned for the preferred investors. The profits above this would be paid to the common stock holders. Based on the latest numbers from the company, the earned income is assessed near 0.83 cents per share per quarter. This would bump it up a small amount; however, two changes will occur in the near future that will reestablish the balance for the investors. The first is when the market stabilizes the price near $25 a share. This will be driven by the fact that the company cannot continue to pay the $1.25 per quarter dividend, and will come down to near $1.00. Investors may react quickly by selling off, but with a dividend of $1.00 per quarter, and stock price near $25, the return would be near 16% and investors will want to partake of the return. We expect to see the run up in stock price near the Ex-date, and sell-off soon after, but long-term investors will appreciate a double-digit return.
There is one downside that may have an effect on the financial market right now and that can create disruptions in AGNC's quarterly reports. That effect is the change in interest rates when the Feds start to reduce the purchases of bonds each month. AGNC may be positioned to increase the spread, which would increase its profits, or may be squeezed by the increase that reduces its profitability. Timing in the market will be everything.
A political effect in the financial markets will be discussed more in the media over the next several months, one that includes President Obama's nomination of Mel Watt, for the head of the Federal Housing Finance Agency, which is the independent regulator with oversight of Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC), the Government Sponsored Enterprises (GSEs). This confirmation process through the Senate is expected to drag into the summer.
Another factor is the U.S. Treasury and HUD's white paper listing three possible courses of action, with no recommendation and each option describes an extensive list of changes to Fannie Mae and Freddie Mac. The timeline for action just grew on Capital Hill. Congress and the White House will attempt to work an agreement along party lines and not reach a comprehensive plan for the future of the GSEs in the near term nor is it expected during this Presidency. Both Fannie Mae and Freddie Mac are expected to continue as is for the foreseeable future.
All of these events create a positive environment for the additional sale of 10-20 million dollars of preferred stock that benefits all investors of AGNC.
AGNC is a real estate investment trust that invests in agency pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity.