American Capital Agency Corp.: The Dividend Now Looks Quite Sustainable

| About: AGNC Investment (AGNC)


AGNC recently declared a $0.65 per share dividend for Q1 2014, unchanged from Q4 2013.

This marks the first quarter in nearly a year where AGNC has not lowered the dividend.

AGNC has likely seen its NIM and book value increase in recent months.

In addition, American Capital has bought back $74M worth of stock this quarter, or 1% of the float.

American Capital Agency Corp. (NASDAQ:AGNC) has had quite a rocky road over the past year or so. The company faced severe pressure, as its book value and net interest spread fell as a result of the volatility seen in the agency MBS. However, in recent months, American Capital has likely seen these key metrics improve as the overall mREIT market has stabilized.

American Capital maintains its dividend at $0.65 per share, yields 11.85%

On March 20, American Capital announced a $0.65 per share dividend for Q1 2014, unchanged from the Q4 2013 dividend, but still a 48%, or $0.60 per share decline from the Q1 2013 dividend of $1.25.

The Q1 2014 dividend breaks a streak of four back-to-back quarterly dividend reductions by American Capital. Indeed, over the past few months, American Capital's share price has stabilized, as it is highly correlated to its expected future dividend level.

Why has the dividend stabilized?

In the past, American Capital was seeing lower dividends due to weakening net interest rate spreads, as well as the reduced use of leverage. However, this situation seems to have largely reversed itself. For example, in Q4 2013, American Capital saw its net spread increase to 1.57%, up from 1.20% for Q3 2013. This was the highest net spread for the company since 2012.

In general, mREITS like American Capital make the most money in stable rate environments. So far in Q1 2014, the 10-year treasury yield has largely remained range-bound, at or around 2.70%. This is a sharp contrast to late 2013, where a rise to over 3.00% seemed inevitable.

The company generated about $0.75 per share in net spread income for Q4 2013. I believe a very similar amount will be generated for this quarter. American Capital may also be able to wind down some of its hedges, further increasing its margins.

Unless something unexpected happens with rates, it seems as if American Capital's current dividend level of $0.65 per share seems rather "safe" short-term. That being said, safety with mREITs is a relative matter and is never a sure thing.

American Capital is buying back stock, but at a slower pace

In its press release, American Capital noted that it was continuing to buy back stock, purchasing approximately 3.4 million shares, or 1% of the total outstanding common stock, via open market transactions. The average price was about $22.10 per share, including expenses, totaling approximately $74 million.

While buying back $74 million worth of stock in a quarter is impressive, it is well below the buybacks for last quarter.

During Q4 2013, American Capital bought back over 28.2 million shares for about $600 million ($21.28 per share average), good for about 7% of the common shares outstanding.

American Capital is mostly funding its share buybacks via selling portions of its MBS portfolio. This makes sense, as the company is basically selling its MBS at par to then buy back its own stock at under book value. As of year-end, American Capital's book value was about $23.93, while shares of the company are trading nearly 10% below this level.


A few months ago, American Capital's discount to book value stood at over 20%. However, as the overall MBS market has stabilized, so has American Capital's stock. Shares of the company are up over 13% YTD, and may continue to go higher.

The fact that American Capital is slowing down its share buybacks may be an indication that the company would rather hold onto its MBS portfolio than sell them onto the open market. This is likely good news for owners of American Capital stock.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long AGNC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.