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Summary

  • Analysts expect AGNC to earn $0.66/share when the company announces its Q2 results on July 28.
  • Recent trend behavior could improve during the second half of the year if AGNC can meet and/or exceed analyst earnings expectations for the upcoming quarter.
  • If AGNC can demonstrate a steady increase in its comprehensive income, then it should have no problem exceeding quarterly estimates during the June quarter.

As an investor who has covered the mortgage REIT sector for quite some time, I always find it necessary to determine what needs to occur in order for a company to meet and/or exceed analyst expectations. With that said, I wanted to take a closer look and share my thoughts on what needs to happen in order for American Capital Agency (NASDAQ:AGNC) to deliver a fairly solid quarter when the company's announces its results on July 28.

Company Overview

Headquartered in Bethesda, Maryland, American Capital Agency operates as a real estate investment trust [REIT]. The company invests in residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by government-sponsored enterprise or by the United States government agency. It funds its investments primarily through short-term borrowings structured as repurchase agreements.

Recent Trend Behavior

On Wednesday, shares of AGNC, which currently possess a market cap of $8.29 billion, a forward P/E ratio of 9.19, and a dividend yield of 11.06% ($2.60), settled at a price of $23.51/share. Based on a closing price of $23.51/share, shares of AGNC are trading 1.82% above their 20-day simple moving average, 2.41% above their 50-day simple moving average, and 14.40% above their 200-day simple moving average.

Although these numbers indicate both a short and long term uptrend for the stock, which generally translates into a buying mode for most near-term traders and many long-term investors, I strongly believe if the company's trend behavior will continue to improve well after it announces Q2 results on July 28.

Upcoming Earnings Outlook

When it comes to the company's upcoming Q2 earnings, there are a number of things potential investors should consider. For instance, analysts are currently calling for AGNC to earn $0.66/share in terms of EPS (which is $1.07/share higher than what the company had reported during Q1 2014, and $3.03/share higher than what the company had reported during the year-ago period) and $5.31 billion in terms of revenue when its latest earnings are released on July 24.

In order to meet and/or exceed its quarterly EPS estimates, I'd like to see an increase in the company's comprehensive income (I'm looking for at least a 3% increase from the previous quarter and a suggested range of at least $435 million-to-$445 million), a slight increase in the company's net premium amortization (I'm looking for at least a 1% change from the previous quarter's net premium amortization and for its net premium amortization to fall into a suggested range of at least $144 million-to-$150 million), and lastly, a slight increase in the company's net spread and dollar roll income (I'm looking for at least a 2% change from the previous quarter's net spread and dollar roll income and for its net spread and dollar roll income to fall into a suggested range of at least $0.72/share-to-$0.74/share).

Thoughts on AGNC's September Dividend

If the yield curve increases over the next 6-12 months the company would have the ability to buy higher yielding bonds and could see its leverage ratio rise to somewhere between 6.0x and 6.5x (versus Q1's leverage ratio of 5.9x) which could very well support a quarterly payout range of $0.68/share to $0.71/share.

Conclusion

For those of you who may be considering a long-term position in American Capital Agency, I'd actually look to keep a closer eye on yield spreads over the next 6-12 months as they could very well impact the company's near-term dividend behavior. In terms of the company's upcoming quarter, steady increases of at least 3% in the company's comprehensive income as well as a solid increase of at least 1% in terms of its net premium amortization could help AGNC meet or even surpass analyst expectations when it announces earnings on July 28.

Disclosure: The author is long AGNC. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Source: American Capital Agency: Looking Ahead To The Company's Upcoming Quarter