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Author's Note: This article provides a detailed analysis with supporting documentation on the "probable" quarterly dividend per share rate American Capital Agency Corp (AGNC) will declare for the fourth quarter of 2013. I perform this detailed analysis for readers who anticipate/want such an analysis performed each quarter. For readers who just want the summarized conclusions/results, I would suggest to just scroll down to the "Conclusions Drawn" section at the bottom of the article.

Focus of Article:

The focus of this article is to provide a detailed analysis of AGNC's dividend range scenarios for the fourth quarter of 2013. I am writing this particular article due to the continued high demand that such an analysis be performed. Understanding the 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. Within this article, three dividend range scenarios will be provided and analyzed.

This analysis should prove beneficial to readers due the recent volatile nature of AGNC's dividend per share declarations. During the second quarter of 2013, AGNC cut the company's quarterly dividend rate from $1.25 per share to $1.05 per share. This dividend cut was the first quarterly dividend reduction since the first quarter of 2012. During the third quarter of 2013, AGNC continued to cut the company's quarterly dividend rate from $1.05 per share to $0.80 per share. Due to the rapidly declining dividend per share rate, I feel this specific analysis has heightened importance.

A previous article I wrote laid the ground works for this dividend range scenarios analysis. Within that article, I analyzed AGNC's general dividend sustainability after the company reported somewhat disappointing results for the third quarter of 2013. This article takes the prior analysis a step further by comparing several possible dividend per share rates for the fourth quarter of 2013. I would suggest readers to refer back to this prior article to better understand the analysis that will be performed in this article.

The link to the prior article's analysis is provided below:

American Capital Agency's Dividend Sustainability Analysis (Post Q3 2013 Earnings) - Part 1

At the end of this article, there will be a conclusion regarding the probabilities of the three dividend range scenarios portrayed in this analysis. This will be followed by a personal projection of what I feel AGNC's dividend per share rate will be for the fourth quarter of 2013. Prior to this article's conclusion, a brief dividend range analysis for the fourth quarter of 2013 regarding AGNC's sister company American Capital Mortgage Corp. (MTGE) will also be performed.

Brief Discussion of AGNC's Annual REIT Taxable Income ('AREITTI'):

In prior dividend range scenario articles, I provided readers a table showing certain AGNC AREITTI amounts from years past. In order for AGNC to maintain its qualified REIT status per the Internal Revenue Code ('IRC'), 90% of the company's AREITTI must be distributed in a calendar tax year. This provision allows for the exclusion of net capital gains within an entity's AREITTI amount. If AGNC were to fail this provision, it would be declassified as a REIT entity under "Subchapter M" of the IRC for four years. However, AGNC is allowed to treat dividends declared by September 15th and paid by December 31st of a given year as being a distribution of the company's AREITTI from the prior tax year. This is referred as AGNC's "spillback/paid-in-arrears" provision.

Regarding AGNC's dividend range scenarios for the second and third quarters of 2013, this aforementioned table was the foundation when "pin-pointing" a certain level of dividend distributions AGNC needed to declare to maintain its qualified REIT status per the IRC (amongst various other provisions). However, since AGNC's fourth quarter of a given year is really the first quarter of the spillback/paid-in-arrears provision, I feel this table is not needed for AGNC's dividend range scenarios analysis for the fourth quarter of 2013. This table will be reintroduced to this analysis starting with the second quarter of 2015.

Regarding this omitted table, it should be noted upon the dividend of $0.80 per share for the third quarter of 2013, AGNC distributed approximately 91% of the company's 2012 AREITTI between the fourth quarter of 2012 and third quarter of 2013. AGNC's 2012 AREITTI distribution payout ratio of only 91% was mainly due to the rapid "spike" in mortgage interest rates/U.S. Treasury yields causing material MBS price declines during 2013. As such, this adversely affected AGNC's MBS valuations and made AGNC increase the company's quarterly hedging costs. Furthermore, through the company's deleveraging and transition into a greater proportion of 15-year fixed-rate MBS to minimize book value ('BV') erosion, quarterly estimated REIT taxable income ('ERTI') began to materially decline.

When compared to past results, AGNC's 2012 AREITTI distribution payout ratio of 91% was by far the worst ratio since the company's initial public offering ('IPO') in 2008. In sharp contrast, AGNC had 2008, 2009, 2010, and 2011 AREITTI distribution payout ratios of 219%, 174%, 307%, and 157%, respectively. Part of these lofty payout ratios were directly due to the rapid expansion of AGNC's MBS portfolio while investments looked more attractive and there was easy access to capital. As was discussed in my recent article on AGNC's general dividend sustainability (link near top of article), declining average quarterly ERTI and cumulative undistributed taxable income ('UTI') figures caused the company to quickly reduce this specific ratio during 2013 via lower quarterly dividend per share distributions.

Side Note: Since AGNC is an agency mREIT, investors should be aware all principle and interest payments regarding the company's MBS holdings are backed by government sponsored entities ('GSE'). This includes both Fannie Mae (OTCQB:FMCC) and Freddie Mac (OTCQB:FNMA) MBS holdings. As such, all principle and interest payments are guaranteed by the respective GSE.

Dividend Range Scenarios for the Fourth Quarter of 2013 - Overview:

Before specifically analyzing my dividend range scenarios for the fourth quarter of 2013, let us first get accustomed to the information provided in Table 1 below. This will be beneficial when explaining how each dividend range scenario will impact certain AGNC quarterly ERTI and cumulative UTI figures and ratios. AGNC's quarterly ERTI and cumulative UTI figures are the cornerstone of understanding why the company declares a certain quarterly dividend per share rate. All figures within Table 1 are for the "three-months ended" (quarterly) timeframe except for AGNC's cumulative UTI balance. AGNC's cumulative UTI balance is a "running balance" that is portrayed at a certain "point-in-time".

Table 1 - AGNC Cumulative UTI Balance + Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio Analysis


(Click to enlarge)

Let us first get accustomed to several of the accounts displayed within Table 1 above. This will be followed by a brief description on how Table 1 is calculated. All accounts discussed below are shown within the "Ref." column in Table 1 above next the September 30, 2013 column.

ERTI - Common Shareholders (See Red Reference "(C - D) = E" in Table 1 Above):

As discussed in previous articles, these figures are extremely important for AGNC. Due to the specific IRC provision stating an entity must distribute at least 90% of the company's AREITTI to retain its qualified REIT status (mentioned earlier in this article), AGNC partially bases its current and future dividend per share rates on these figures. These figures are mainly derived from AGNC's quarterly "net income" and all quarterly "book to tax differences (reversals)".

Weighted Average Common Shares Outstanding (See Red Reference "F" in Table 1 Above):

These figures represent AGNC's weighted average of outstanding common shares for a given quarter. These figures will change anytime AGNC issues (buys back) outstanding common shares of the company's stock.

Distributions to Stockholders from ERTI (See Red Reference "G" in Table 1 Above):

These figures represent the quarterly accrual made in regards to AGNC's dividend distributions on the company's outstanding common shares. This accrual is made in the current quarter and paid the following quarter. Through research, one can calculate these quarterly amounts via disclosed data.

Underpayment (Overpayment) of ERTI (See Red Reference "(E - G) = H" in Table 1 Above):

These figures represent the quarterly underpayment (overpayment) of ERTI when compared to AGNC's dividend distributions on the company's outstanding common shares. Table 1 above also includes what percentage of quarterly ERTI is paid out in the form of dividend distributions (see red reference "G / E" in Table 1 above) for additional clarity and insight. Again, AGNC does not provide this specific information. However, one can calculate AGNC's quarterly underpayment (overpayment).

Cumulative UTI Recalculation (Per My Sheet / Per AGNC) (See Red References "I" / "J" in Table 1 Above):

These figures represent past undistributed ERTI after AGNC accrues for the company's quarterly dividend distributions. As stated earlier, these figures are a cumulative running balance. The cumulative UTI balance increases if AGNC's quarterly ERTI is more than the company's accrued quarterly dividend distributions. The cumulative UTI balance deceases if AGNC's quarterly ERTI is less than the company's accrued quarterly dividend distributions.

Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio (See Red Reference "(J / G) = K" in Table 1 Above):

These ratios represent AGNC's cumulative UTI surplus (deficit) when divided by AGNC's quarterly dividend distributions. This can also be referred to as AGNC's "UTI per share" amount.

Now that we have a better understanding of some of the accounts, let us briefly describe how Table 1 is calculated. Table 1 above shows AGNC's ERTI from the third quarter of 2013 going back to the company's fourth quarter in 2012. Table 1 also shows AGNC's past quarterly dividend distributions. Table 1 above then compares AGNC's quarterly ERTI to the company's dividend distributions showing the quarterly underpayment (overpayment). Table 1 then compares AGNC's quarterly dividend distributions to the company's cumulative UTI balance during the same quarter. As mentioned earlier, AGNC's cumulative UTI figure is a running balance that either increases or decreases each quarter as the company either underpays (overpays) its quarterly dividend distributions. Now let us see how AGNC's recent past performance has affected the company's recent dividend distributions.

Using Table 1 above as a reference, AGNC had a cumulative UTI balance of $749 million by the end of the fourth quarter of 2012. Even though the weighted average of AGNC's outstanding common shares increased, the cumulative UTI coverage of quarterly dividend distributions ratio increased to a factor of 1.76 at the end of the fourth quarter of 2012. This indicated AGNC was increasing cumulative UTI at a rate that outpaced the company's increase in the number of weighted average outstanding common shares. This was an extremely positive sign at the time as AGNC amassed a lofty cumulative UTI balance.

However, when the company reported very weak quarterly ERTI of just $0.50 per share for the first quarter of 2013, AGNC's cumulative UTI coverage of quarterly dividend distributions ratio fell from a factor of 1.76 as of 12/31/2012 to a factor of only 0.86 as of 3/31/2013. AGNC had a quarterly dividend distributions overpayment of ($322) million in the first quarter of 2013. Such a material overpayment caused AGNC's cumulative UTI balance to lose approximately (43%) of its surplus balance in just three months. AGNC's cumulative UTI balance went from $749 million as of 12/31/2012 to $430 million as of 3/31/2013. For just one quarter's worth of activity, this was a material hit to AGNC's cumulative UTI balance.

For the second quarter of 2013, AGNC reported a cumulative UTI balance of $425 million. As such, only a cumulative UTI decrease of ($8) million occurred during the second quarter of 2013. Since AGNC cut its dividend during the second quarter of 2013, instead of having to achieve quarterly ERTI of nearly $500 million before "breaking-even" within its cumulative UTI balance, the company now only needed to achieve quarterly ERTI of approximately $420 million to break-even. AGNC's cumulative UTI coverage of quarterly dividend distributions ratio rose from a factor of 0.86 as of 3/31/2013 to a factor of 1.01 as of 6/30/2013. This partially occurred from the material dividend cut that occurred in the second quarter of 2013 ($1.25 per share to $1.05 per share). Even though this ratio's increase was partially due to AGNC's dividend cut, any rise in this ratio was positive news.

However, when the company once again reported very weak quarterly ERTI of $0.29 per share for the third quarter of 2013, AGNC's cumulative UTI coverage of quarterly dividend distributions ratio fell from a factor of 1.01 as of 6/30/2013 to a factor of 0.70 as of 9/30/2013. This factor even takes into consideration the additional dividend cut of ($0.25) per share that occurred during the third quarter of 2013. AGNC had a quarterly overpayment of ($198) million in the third quarter of 2013. As such, AGNC's results for the third quarter of 2013 were fairly negative regarding the company's dividend. Such a material overpayment caused AGNC's cumulative UTI balance to lose an additional (48%) of its surplus balance within three months. AGNC's cumulative UTI balance went from $425 million as of 6/30/2013 to $219 million as of 9/30/2013. For just one quarter's worth of activity, this was a material hit to AGNC's cumulative UTI balance.

Now that we have a better understand of the recent history of AGNC's quarterly ERTI and cumulative UTI figures/ratios, three dividend range scenarios for the fourth quarter of 2013 will be analyzed and discussed below. Each dividend range scenario contains slight variations to the assumed quarterly dividend per share rate and shows how these subtle changes would affect certain ERTI and cumulative UTI figures/ratios that were discussed within Table 1 above.

The following three dividend range scenarios will be analyzed and discussed:

1) Best Case Scenario: Quarterly Dividend of $0.75 - $0.80 Per Share

2) Worst Case Scenario: Quarterly Dividend of $0.50 - $0.55 Per Share

3) "Middle-of-the-Road" Scenario: Quarterly Dividend of $0.60 - $0.70 Per Share

Side Note: AGNC typically declares the company's quarterly dividend distributions in increments of $0.05 per share. As such, there are minor "gaps" between the three dividend range scenarios which are intentional. Regarding the best case dividend range scenario, I use a quarterly dividend rate of $0.80 per share (shown in Table 2 below). Regarding the worst case dividend range scenario, I use a quarterly dividend rate of $0.50 per share (shown in Table 3 below). For both of these scenarios, I use the extremes of each range to heighten/illustrate the differences between the two scenarios regarding all calculated figures/ratios. For the middle-of-the-road dividend range scenario, I use a quarterly median dividend of $0.65 per share (shown in Table 4 below).

1) Best Case Scenario: Quarterly Dividend of $0.75 - $0.80 Per Share (Low Probability)

Now let us discuss my projected best case scenario. This scenario assumes a dividend range of $0.75 - $0.80 per share will be declared for the fourth quarter of 2013. Table 2 below projects what would happen to AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio if a dividend rate of $0.80 per share was declared for the fourth quarter of 2013.

Table 2 - AGNC Cumulative UTI Balance + Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio Analysis (Best Case Scenario)


(Click to enlarge)

Using Table 2 above as a reference, I am projecting AGNC will report quarterly ERTI of $216 million for the fourth quarter of 2013. Management "hinted" during AGNC's earnings call for the third quarter of 2013 that the company's ERTI will likely continue to remain suppressed during the fourth quarter of 2013 due to certain tax recognitions regarding MBS and derivative portfolio transactions. The following is a quote from AGNC's Chief Investment Officer ('CIO') Gary Kain during the same earnings call referenced above:

"…also important to point out that our taxable income in the fourth quarter is likely to remain under some pressure as we continue to divest some lower coupon 30 year securities which are probably not going to fit our investment objectives over the intermediate term. To this point, we proactively choose to sell a large number of securities and replace them with other MBS that we believe are better suited to the evolving landscape. I want to stress that we will continue to prioritize long run economic value over short-term tax and accounting results and earnings…"

The quoted text above helps support my projected quarterly ERTI of $216 million for the fourth quarter of 2013. The following additional quote by Mr. Kain from the same earnings call would support the general trend of a lower quarterly ERTI figure for the fourth quarter of 2013:

"…we described the scenario where the employment picture and the economy as a whole quickly regained momentum allowing the Fed to taper relatively soon, let's say by January. While the probability of this scenario seems to be dropping with most economists calling for a March taper at earliest, it is still a possibility… Now if we felt this was the likely scenario, we would want to lower our leverage, sell more of low coupon 30-year MBS and increase our hedge ratios despite the significant headwinds these action would create with respect to our earnings..."

Due to the fact 30-year fixed-rate mortgage interest rates and 10-year U.S. Treasury yields have increased approximately 35 basis points ('bps') during the past four weeks (due to several recent "better than expected" economic indicators/reports), I feel AGNC's management has set the quoted strategy above in motion during the fourth quarter of 2013.

Still using Table 2 above as a reference, if AGNC declares a dividend rate of $0.80 per share for the fourth quarter of 2013, the company would have a quarterly overpayment of approximately ($83) million. As such, the company's cumulative UTI balance would decline from $219 million as of 9/30/2013 to approximately $136 million as of 12/31/2013. Such a material overpayment would cause AGNC's cumulative UTI balance to lose an additional (38%) of its surplus balance during the fourth quarter of 2013. Furthermore, AGNC's cumulative UTI dividend distributions coverage ratio would materially decrease from a factor of 0.70 as of 9/30/2013 to a factor of 0.45 as of 12/31/2013.

From charting past trends regarding AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio, I have come to the realization AGNC is cautious when it comes to this balance/ratio. If this best case scenario occurred, there would be a material overpayment of AGNC's quarterly ERTI thus a material decrease in the company's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio. As such, this is why I personally feel this scenario has a very low probability (10% chance) of occurring. I am not saying this scenario "could not" occur. However, I feel relatively strong this best case scenario "should not" occur.

2) Worst Case Scenario: Quarterly Dividend of $0.50 - $0.55 Per Share (Probability - Low to Moderate)

Now let us discuss my projected worst case scenario. This scenario assumes a dividend range of $0.50 - $0.55 per share will be declared for the fourth quarter of 2013. Table 3 below projects what would happen to AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio if a dividend rate of $0.50 per share was declared for the fourth quarter of 2013.

Table 3 - AGNC Cumulative UTI Balance + Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio Analysis (Worst Case Scenario)


(Click to enlarge)

Using Table 3 above as a reference, if AGNC declares a dividend rate of $0.50 per share for the fourth quarter of 2013, the company would have a quarterly underpayment of approximately $28 million. As such, the company's cumulative UTI balance would rise from $219 million as of 9/30/2013 to approximately $247 million as of 12/31/2013. This minor underpayment would cause AGNC's cumulative UTI balance to regain 13% of its surplus balance during the fourth quarter of 2013. Furthermore, AGNC's cumulative UTI dividend distributions coverage ratio would materially increase from a factor of 0.70 as of 9/30/2013 to a factor of 1.31 as of 12/31/2013.

As stated earlier, from charting past trends regarding AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio, I have come to the realization AGNC is cautious when it comes to this balance/ratio. If this worst case scenario occurred, there would be a modest underpayment of AGNC's quarterly ERTI, a modest increase in the company's cumulative UTI balance, and a material increase in the company's cumulative UTI dividend distributions coverage ratio. The material increase in this ratio leads me to believe the worst case scenario does not have the highest probability of occurring. However, I feel the worst case scenario has a higher probability of occurring versus the best case scenario. As such, this is why I personally feel this scenario has a low to moderate probability (30% chance) of occurring. I am not saying this scenario "could not" occur. However, I feel somewhat certain this worst case scenario "should not" occur.

3) Middle-of-the-Road Scenario: Quarterly Dividend of $0.60 - $0.70 Per Share (Probability - Moderate to High)

In my opinion, out of the three dividend range scenarios, the middle-of-the-road scenario is most likely to occur. This scenario assumes a dividend range of $0.60 - $0.70 per share will be declared for the fourth quarter of 2013. Table 4 below projects what would happen to AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio if a dividend rate of $0.65 per share was declared for the fourth quarter of 2013.

Table 4 - AGNC Cumulative UTI Balance + Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio Analysis (Middle-of-the-Road Scenario)


(Click to enlarge)

Using Table 4 above as a reference, if AGNC declares a median dividend rate of $0.65 per share for the fourth quarter of 2013, the company would have a quarterly overpayment of approximately ($28) million. As such, the company's cumulative UTI balance would decline from $219 million as of 9/30/2013 to approximately $191 million as of 12/31/2013. This minor overpayment would cause AGNC's cumulative UTI balance to lose an additional 13% of its surplus balance during the fourth quarter of 2013. However, AGNC's cumulative UTI dividend distributions coverage ratio would slightly increase from a factor of 0.70 as of 9/30/2013 to a factor of 0.78 as of 12/31/2013.

As stated earlier, from charting past trends regarding AGNC's cumulative UTI balance and cumulative UTI dividend distributions coverage ratio, I have come to the realization AGNC is cautious when it comes to this balance/ratio. If this middle-of-the-road scenario occurred, there would be a modest overpayment of AGNC's quarterly ERTI thus a modest decrease in the company's cumulative UTI balance. However, in contrast to the worst case scenario, there would be a minor increase in the company's cumulative UTI dividend distributions coverage ratio. These slight offsetting factors lead me to believe the middle-of-the-road scenario has the highest probability of occurring. As such, this is why I personally feel this scenario has a moderate to high probability (60% chance) of occurring. I am not saying this scenario "will definitely" occur. However, I feel confident this middle-of-the-road scenario "should" occur.

Let us now perform a brief dividend range analysis for the fourth quarter of 2013 regarding AGNC's sister company MTGE.

Brief Analysis of MTGE's Dividend Range for the Fourth Quarter of 2013:

Table 5 - MTGE Cumulative UTI Balance + Cumulative UTI Coverage of Quarterly Dividend Distributions Ratio Analysis


(Click to enlarge)

Using Table 5 above as a reference, MTGE had a cumulative UTI balance of approximately $42 million by the end of the fourth quarter of 2012. Even though the weighted average of MTGE's outstanding common shares increased, the cumulative UTI coverage of quarterly dividend distributions ratio increased to a factor of 1.29 at the end of the fourth quarter of 2012. As was the case with AGNC, this indicated MTGE was increasing cumulative UTI at a rate that outpaced the company's increase in the number of weighted average outstanding common shares.

However, when the company reported rather weak quarterly ERTI of $0.80 per share for the first quarter of 2013, MTGE's cumulative UTI coverage of quarterly dividend distributions ratio fell from a factor of 1.29 as of 12/31/2012 to only a factor of 0.50 as of 3/31/2013. This was a (61%) reduction to this ratio in just one quarter. It should be noted the material decrease in this ratio was in relation to the company's equity raise of 23 million common shares during the first quarter of 2013. MTGE had a quarterly dividend distributions overpayment of approximately ($15) million in the first quarter of 2013. Such a material overpayment caused MTGE's cumulative UTI balance to lose approximately (37%) of its surplus balance in just three months. MTGE's cumulative UTI balance went from approximately $42 million as of 12/31/2012 to approximately $27 million as of 3/31/2013. For just one quarter's worth of activity, this was a material hit to MTGE's cumulative UTI balance.

For the second quarter of 2013, MTGE reported a cumulative UTI balance of approximately $24 million. As such, only a cumulative UTI decrease of approximately ($3) million occurred during the second quarter of 2013 (included a quarterly "true-down" adjustment of approximately ($2) million). Since MTGE cut its dividend during the second quarter of 2013, instead of having to achieve quarterly ERTI of approximately $53 million before "breaking-even" within its cumulative UTI balance, the company now only needed to achieve a quarterly ERTI of approximately $45 million to break-even. AGNC's cumulative UTI coverage of quarterly dividend distributions ratio rose from a factor of 0.50 as of 3/31/2013 to a factor of 0.53 as of 6/30/2013. This partially occurred from the modest dividend cut that occurred in the second quarter of 2013 ($0.90 per share to $0.80 per share). Even though this ratio's increase was partially due to MTGE's dividend cut, any rise in this ratio was positive news.

MTGE reported modest quarterly ERTI of $0.85 per share for the third quarter of 2013. However, MTGE's cumulative UTI coverage of quarterly dividend distributions ratio materially rose from a factor of 0.53 as of 6/30/2013 to a factor of 0.86 as of 9/30/2013. The main reason for this material increase was the additional dividend cut of $0.10 per share that occurred during the third quarter of 2013 ($0.80 per share to $0.70 per share). MTGE had a quarterly underpayment of approximately $9 million in the third quarter of 2013. MTGE's cumulative UTI balance went from approximately $24 million as of 6/30/2013 to approximately $32 million as of 9/30/2013. For just one quarter's worth of activity, this was a nice "bounce back" to MTGE's cumulative UTI balance.

When compared to AGNC, it looks like MTGE's dividend should hold up better in the fourth quarter of 2013. This is mainly highlighted by each company's cumulative UTI coverage of quarterly dividend distributions ratio. As of 9/30/2013, AGNC's ratio was a factor of 0.70 while MTGE's ratio was a factor of 0.86 which was modestly better. MTGE's dividend may still be cut during the fourth quarter of 2013. However, MTGE's dividend cut should be less (percentage wise) when compared to AGNC. For this reason (and other factors omitted from this analysis), I conclude MTGE will have a slight dividend cut in the fourth quarter of 2013.

MTGE's Dividend Range Projection for the Fourth Quarter of 2013: $0.55 - $0.70 per share

MTGE's Exact Dividend Projection for the Fourth Quarter of 2013: $0.65 per share

A dividend rate of $0.65 per share for the fourth quarter of 2013 helps MTGE mitigate using a material portion of the company's cumulative UTI balance while maintaining a rather modest dividend distributions coverage ratio.

Conclusions Drawn:

This article provided a detailed analysis with supporting documentation on the probable quarterly dividend per share rate AGNC will declare for the fourth quarter of 2013. This was accomplished with an analysis of three dividend range scenarios. Through the analysis of these three dividend range scenarios, I believe a dividend cut is necessary in the current quarter to ensure a modest cumulative UTI balance continues to remain in place as of 12/31/2013. Regarding the possibility of an AGNC dividend cut for the fourth quarter of 2013, I would say this is currently a very high probability (> 85% chance) of occurring. This conclusion is due to the continued volatility in mortgage interest rates/U.S. Treasury yields. 30-year fixed-rate mortgage interest rates and 10-year U.S. Treasury yields have increased approximately 35 bps during the past four weeks. This adversely affects AGNC's asset valuations and will probably cause modest deleveraging and/or a continued transition into a greater proportion of 15-year fixed-rate MBS to minimize BV erosion. Furthermore, AGNC has continued to have a "defensive position" regarding the company's derivative portfolio. Therefore, AGNC's hedging coverage ratio has continued to remain at a relatively high level thus adversely affecting quarterly ERTI.

The following are my best and worst case dividend range scenarios for the fourth quarter of 2013:

1) Best Case Scenario = Quarterly Dividend of $0.75 - $0.80 Per Share
2) Worst Case Scenario = Quarterly Dividend of $0.50 - $0.55 Per Share

I personally feel the best case scenario has a very low probability (10% chance) of occurring while the worst case scenario has a low to moderate probability (30% chance) of occurring. Through the analysis performed and discussed above, I believe the following middle-of-the-road scenario has the highest probability (60% chance) of occurring:

AGNC's Dividend Range Projection for the Fourth Quarter of 2013: $0.60 - $0.70 per share

AGNC's Exact Dividend Projection for the Fourth Quarter of 2013: $0.60 per share

I would also like to point out AGNC's CURRENT BV is trading between a 15 - 20% discount to the company's current stock price of $19.28 as of the week ending 12/6/2013. As such, I feel AGNC will continue to take advantage of this steep discount by buying back the company's outstanding common shares. This has a positive cumulative BV effect and enhances long-term shareholder value. I feel these continued dividend cuts should be taken with a "grain of salt" due to the fact the company continues to repurchase outstanding common shares at a material discount. Through the first-half of the fourth quarter of 2013, AGNC has repurchased approximately 7.2 million shares of the company's outstanding common shares. Unless AGNC's stock price rapidly increases over the next three weeks, this material discount to CURRENT BV will continue through the end of the quarter. As such, I am projecting AGNC will repurchase approximately 15 million shares during the fourth quarter of 2013.

Finally, it should be noted I do not expect this newly reduced dividend rate to be declared for more than several quarters. Once AGNC "re-rolls" its MBS portfolio into higher-yielding coupons, AGNC's assets should stabilize in value while eventually generating a higher net spread income as LIBOR remains suppressed (steepening of the yield curve). This will eventually cause a rise to AGNC's dividend per share rate in future quarters to come. I would currently predict a rise to AGNC's dividend starting in the third quarter of 2014. This is a rough/general projection regarding a potential dividend increase and is subject to change as future events unfold.

Please see the following link to PART 2 of my recent AGNC general dividend sustainability article to read several future taxation considerations regarding AGNC's dividend in a rising interest rate environment:

American Capital Agency's Dividend Sustainability Analysis (Post Q3 2013 Earnings) - Part 2

Source: American Capital Agency's Dividend Range Scenarios For Q4 2013