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Summary

  • AGNC reported estimated REIT taxable income ("ERTI") available to common shareholders of $100 million (or $0.28 per common share) for the second quarter of 2014.
  • However, AGNC reported ERTI and net dollar roll income available to common shareholders of $238 million (or $0.67 per common share) for the second quarter of 2014.
  • AGNC had a quarterly ERTI underpayment (overpayment) of ($130) million and a quarterly payout ratio of 230%.
  • However, AGNC had a quarterly ERTI and net dollar roll underpayment (overpayment) of $8 million and a quarterly payout ratio of 96%.
  • Part 2 will discuss some additional topics/trends to consider in a general net rising (and falling) interest rate environment regarding AGNC’s, MTGE’s, and NLY’s dividend sustainability.

Author's Note: This two-part article is a very detailed look at AGNC's dividend sustainability. 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 scroll down to the "Conclusions Drawn" section at the bottom of the each part of the article.

Focus of Article:

The focus of this article is to provide a detailed analysis with supporting documentation (via two tests) on the dividend sustainability of American Capital Agency Corp. (NASDAQ:AGNC). I am writing this particular article due to the continued high demand that such an analysis be performed. This analysis will be provided after a brief discussion of AGNC's real estate investment trust (REIT) classification per the Internal Revenue Code ("IRC"). Understanding the tax and dividend payout characteristics of AGNC will provide investors with an overall better understanding of the mortgage real estate investment trust (mREIT) sector as a whole. Due to the fact AGNC has produced an annual dividend yield of at least 10.5% since the company's inception in 2008, many investors have chosen this stock (including other stocks within the mREIT sector) for income-producing equity investments. From reading this article, investors will better understand how a qualified REIT entity per the IRC comes up with the company's current dividend rate, and specific signs when an impending dividend raise or cut would be implemented.

I will be performing two dividend sustainability tests within this article. These two tests will be termed "TEST 1" and "TEST 2". This will also include a brief analysis of AGNC's sister company, American Capital Mortgage Corp. (NASDAQ:MTGE), and a discussion of the company's closest sector peer, Annaly Capital Management, Inc. (NYSE:NLY), regarding the same general metrics.

After these two tests are analyzed in PART 1, PART 2 will discuss some recent topics/trends to consider in a general net rising (and falling) interest rate environment. These topics/trends will have a direct impact on AGNC's future dividend sustainability, and therefore, should also be addressed. At the end of this two-part article, there will be a conclusion on my personal opinion about the overall dividend sustainability of AGNC for several upcoming quarters. A specific analysis of AGNC's dividend range scenarios for the third quarter of 2014 will be discussed in a future article next month.

Side Note: I recently wrote a three-part article on AGNC, where I projected the company's consolidated statement of comprehensive income for the second quarter of 2014. In a second article, I projected AGNC's book value ("BV") as of 6/30/2014. These two sets of articles set the foundation for understanding certain types of account descriptions and figures shown in several tables within this article's dividend sustainability analysis. As such, I would recommend new readers to first look at my previous articles to gain a better understanding of AGNC's accounts and how certain figures are derived. The following links are to my recent AGNC consolidated statement of comprehensive income and BV projection articles:

Discussion of AGNC's REIT Classification per the IRC:

Since I have previously discussed this topic in past AGNC dividend sustainability articles, this section of the article will be omitted to reduce redundancy. The link to a prior quarter's dividend sustainability article where this topic was fully discussed is provided below:

Estimated REIT Taxable Income ("ERTI")/ERTI and Net Dollar Roll Overview:

- See Red References "A, B, C, D, E, F, G, H" in Table 1 below next to the June 30, 2014 column

Before we begin AGNC's dividend sustainability analysis, let us briefly get accustomed to the information provided in Table 1 below. Part of Table 1 is the equivalent to AGNC's quarterly shareholder presentation slide called "Reconciliation of Generally Accepted Accounting Principles ("GAAP") Net Income to Estimated Taxable Income". Table 1 below shows AGNC's ERTI/ERTI and net dollar roll from the second quarter of 2014 going back to the third quarter of 2013. All figures within Table 1 are for the "three-months ended" (quarterly) time frame.

Table 1 - AGNC Quarterly ERTI/ERTI and Net Dollar Roll Analysis

(click to enlarge)

(Source: Table created entirely by myself, partially using data obtained from AGNC's quarterly investor presentation slides)

Since I have discussed what accounts/figures comprised Table 1 above in past AGNC dividend sustainability articles (with the exception of the company's net dollar roll figure), such descriptions will be omitted from this article to reduce redundancy. My past dividend sustainability articles highlighted what comprises each red referenced figure and the impacts on AGNC's quarterly ERTI/annual REIT taxable income ("AREITTI"). The link to a prior quarter's dividend sustainability article is provided below:

Due to the specific IRC provision stating an entity must distribute at least 90% of its AREITTI to retain the company's qualified REIT status, AGNC mainly bases the current and future dividend per share amounts upon this figure. However, due to a specific scenario that has recently unfolded regarding AGNC's "true earnings power" and "capital loss carryforward" balance, the company's quarterly ERTI/AREITTI is currently not the ONLY figure AGNC bases the company's dividend distributions on. With that being said, this figure is still an important indicator regarding MINIMUM annual distribution requirements ("ADR"). Now let us perform AGNC's dividend sustainability analysis. This analysis will be a good general indicator of AGNC's current dividend sustainability for the foreseeable future (next several quarters), including whether an impending dividend raise or cut could eventually come to fruition.

Side Note: There are several other indicators and calculations that can help assist or add to one's viewpoint on the dividend sustainability of a company. Some analysts like to prepare some kind of discounted cash flow analysis. With other sectors or even other mREIT companies, I would tend to agree with this notion. However, AGNC's management team provides to the public quarterly ERTI and net dollar roll figures. Most companies do not provide such disclosures to the public, because quarterly ERTI is a non-GAAP measurement (not an SEC requirement). AGNC's ERTI calculation basically converts the company's quarterly net income (loss) per GAAP into the company's taxable net income (loss) per the IRC. Since AGNC provides this valuable information to the public, I believe a discounted cash flow analysis is "trumped" by the quarterly ERTI figure. Since AGNC is classified as a qualified REIT entity per the IRC, the company must distribute 90% of its AREITTI in a given calendar year (disregarding the spillback provision). Management has consistently stated the company bases AGNC's quarterly dividend distributions upon the quarterly ERTI/AREITTI, net dollar roll, and cumulative undistributed taxable income ("UTI") figures. Using this methodology, I have correctly projected (within a narrow specified range or exact per share amount) AGNC's quarterly dividend distributions for the last eight consecutive quarters. I am the only author on Seeking Alpha, or any writer providing articles to the public prior to a dividend declaration, to accomplish this feat. Therefore, I believe TEST 1 and TEST 2 below will be a good "starting point" for an overall dividend sustainability analysis.

TEST 1 - Quarterly ERTI/ERTI and Net Dollar Roll - Common Shareholders Versus Quarterly Distributions Analysis:

Before we begin TEST 1 of AGNC's dividend sustainability analysis, let us first briefly get accustomed to the information provided in Table 2 below. Table 2 is an extension of the information provided in Table 1 above. Table 2 below shows AGNC's ERTI/ERTI and net dollar roll from the second quarter of 2014 going back to the company's third quarter in 2013. All figures within Table 2 below are for the "three-months ended" (quarterly) time frame. Table 2 compares AGNC's quarterly ERTI/ERTI and net dollar roll figures to the company's dividend distributions figure showing the quarterly underpayment (overpayment).

Table 2 - AGNC Quarterly ERTI/ERTI and Net Dollar Roll - Common Shareholders Versus Quarterly Distributions Analysis (TEST 1)

(click to enlarge)

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database)

AGNC does not provide a table that is comparable to most of Table 2 above. As such, there will not be an identical sheet AGNC provides that matches the data I have prepared in Table 2. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's dividend sustainability. Let us briefly describe the new accounts shown within Table 2 above that were not included in Table 1 shown earlier in the article.

I) Distributions to Shareholders from ERTI/ERTI and Net Dollar Roll:

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

J) Underpayment (Overpayment) of ERTI:

These figures represent the quarterly underpayment (overpayment) of AGNC's ERTI when compared to the company's dividend distributions to common shareholders.

Table 2 also includes what percentage of quarterly ERTI is paid out in the form of dividend distributions for additional clarity and insight (see red reference "I/E" in Table 2 above). Again, AGNC does not provide this specific information. However, one can calculate the percentage of AGNC's quarterly underpayments (overpayments).

K) Underpayment (Overpayment) of ERTI and Net Dollar Roll:

These figures represent the quarterly underpayment (overpayment) of AGNC's ERTI and net dollar roll, when compared to the company's dividend distributions to common shareholders.

Table 2 also includes what percentage of quarterly ERTI and net dollar roll is paid out in the form of dividend distributions for additional clarity and insight (see red reference "I/H" in Table 2 above). Again, AGNC does not provide this specific information. However, one can calculate the percentage of AGNC's quarterly underpayments (overpayments).

TEST 1 - Analysis and Results:

Using Table 2 above as a reference, I take AGNC's quarterly "ERTI - common shareholders" figure (see red reference "E" in Table 2 above) and subtract this amount by the quarterly "distributions to shareholders from ERTI" figure (see red reference "I" in Table 2 above). If AGNC's red reference "E" is greater than the company's red reference "I", then AGNC technically has enough quarterly ERTI to pay out the company's dividend distributions for a particular quarter. As such, any excess quarterly ERTI left over (after accounting for the dividend distributions) would be added to AGNC's cumulative UTI balance. UTI will be further discussed within TEST 2 later in the article. If AGNC's red reference "E" is less than the company's red reference "I", then AGNC has currently overpaid the company's quarterly dividend distributions, and must use a portion of the remaining cumulative UTI balance to help pay for the overpayment.

For the second quarter of 2014, AGNC reported quarterly ERTI of only $0.28 per common share. This reported figure was a bit of a disappointment when compared to my projected quarterly ERTI (towards the lower-end of my range). This was due to the fact management continued to increase AGNC's "off-balance sheet" "to-be-announced" ("TBA") MBS portfolio, while refraining from increasing the company's "on-balance sheet" regular MBS portfolio.

When compared to the prior quarter, the second quarter of 2014 saw a modest (some could argue material) decrease in AGNC's quarterly ERTI figure. For the second quarter of 2014, AGNC had ERTI available to common shareholders of $100 million. However, AGNC distributed ($230) million of dividends. This equated to an underpayment (overpayment) of ($130) million and a payout ratio of 230%. When compared to the payout ratios from the prior two quarters, this quarterly payout ratio should be seen as a negative sign if this was the only metric to analysis within TEST 1.

However, as pointed out by my prior quarter's dividend sustainability article, due to a specific scenario that has recently unfolded regarding AGNC's "true earnings power" and "capital loss carryforward" balance, the company's quarterly ERTI/AREITTI is currently not the ONLY figure AGNC bases the company's dividend distributions on. Due to the attractive yields and net dollar roll income being generated from AGNC's net long TBA MBS position, the company has stated its dividend will continue to be based on the earnings of the entire MBS portfolio (both on-balance sheet and off-balance sheet portfolios) for the foreseeable future. The following quote is from AGNC's chief investment officer ("CIO"), Gary Kain, during the company's earnings call for the second quarter of 2014:

"…We will continue to base our dividends on the true earnings of the portfolio and this position will not be impacted by the use of the capital loss carryforward. This will result in a portion of the dividend being treated as a return of capital versus ordinary income…"

Since AGNC's net long TBA MBS position is basically an extension of the balance sheet, I believe all net dollar roll income generated from these investments should be added to the company's quarterly ERTI figure to better visualize the earnings of the entire portfolio. Dollar roll income (expense) from a net long (short) TBA MBS position is treated as a reduction (addition) of an entity's cost basis per the IRC. As such, currently all net dollar roll income is being offset against AGNC's 2013 capital loss carryforward. However, as management indicated, a portion of AGNC's dividend will be based on the company's net dollar roll from its TBA MBS portfolio, which would be treated as a return of one's capital (actually has favorable taxation characteristics to shareholders).

Still using Table 2 as a reference, for the second quarter of 2014, AGNC reported quarterly ERTI and net dollar roll of $0.67 per common share. This reported figure was very close to my projected ERTI and net dollar roll of $0.72 per common share. I provided this projection in my quarterly dividend range scenarios article back on 6/10/2014 (see Table 5).

When compared to the prior quarter, the second quarter of 2014 saw a modest increase in AGNC's quarterly ERTI and net dollar roll figure. For the second quarter of 2014, AGNC had ERTI and net dollar roll available to common shareholders of $238 million. As stated earlier, AGNC distributed ($230) million of dividends. This equated to an underpayment (overpayment) of $8 million and a payout ratio of 96%. When compared to the payout ratios for the prior two quarters, this quarterly payout ratio was a slight improvement.

When looking at the results from TEST 1, I believe the probability of AGNC being able to maintain the company's current dividend of $0.65 per common share has remained relatively unchanged when compared to the prior quarter. The main factor for this determination is AGNC's net dollar roll income that is currently being generated from the company's net long TBA MBS position. If AGNC decides to lower its net long TBA MBS position by converting the off-balance sheet position to regular on-balance sheet MBS, net dollar roll income would decrease. However, directly offsetting this decrease would be an increase to quarterly ERTI.

When combining results from TEST 1 with conclusions drawn from my recent articles, a good foundation is formed on AGNC's recent performance regarding the company's quarterly ERTI and net dollar roll. However, TEST 1 does not come with certain drawbacks and limitations. This is why I believe additional analysis should be performed within this article. TEST 1 does not specifically account for AGNC's cumulative UTI/cumulative UTI and net dollar roll balance (which will be discussed in TEST 2 below) or any future topics/trends to consider (which will be discussed in PART 2 of this article). Since TEST 1 does not specifically include these additional factors, it would only be prudent to now perform TEST 2 and see if similar results can be ascertained. TEST 2 needs to be performed to gain further clarity on AGNC's future dividend sustainability in the upcoming quarters.

TEST 2 - Cumulative UTI/Cumulative UTI and Net Dollar Roll Coverage of Quarterly Dividend Distributions Ratio Analysis:

Before we begin TEST 2 of AGNC's dividend sustainability analysis, let us first get accustomed to the information provided in Table 3 below. Table 3 is an extension of the information provided in Table 2 above. Table 3 below shows AGNC's dividend distributions from the second quarter of 2014 going back to the company's third quarter in 2013. Table 3 also shows AGNC's quarterly underpayment (overpayment) of the company's ERTI/ERTI and net dollar roll (discussed in TEST 1 above). Table 3 below then compares AGNC's quarterly dividend distributions to the company's cumulative UTI/cumulative UTI and net dollar roll balance for the same quarter. All figures within Table 3 are for the "three months ended" (quarterly) time frame, except for AGNC's cumulative UTI/cumulative UTI and net dollar roll balance. The cumulative UTI/cumulative UTI and net dollar roll figure is a "running balance" that either increases or decreases each quarter as AGNC underpays (overpays) the company's quarterly dividend distributions.

Table 3 - AGNC Cumulative UTI/Cumulative UTI and Net Dollar Roll Coverage of Quarterly Dividend Distributions Ratio Analysis (TEST 2)

(click to enlarge)

(Source: Table created entirely by myself, partially using AGNC data obtained from the SEC's EDGAR Database [link provided below Table 2])

AGNC does not provide a table that is comparable to Table 3 above. As such, there will not be an identical sheet AGNC provides that matches the data I have prepared in Table 3. I have gathered specific information derived from multiple tables/charts for a more detailed analysis of AGNC's dividend sustainability. Let us briefly describe the new accounts shown within Table 3 above that were not included in Table 2 shown earlier in the article.

L) Cumulative UTI Recalculation (Per My Calculation) and M) Cumulative UTI Balance (Per AGNC):

Cumulative UTI is the running balance of AGNC's past undistributed ERTI after management accrues for the company's quarterly dividend distributions. The cumulative UTI balance increases if AGNC's quarterly ERTI figure is more than the accrued quarterly dividend distributions figure. The cumulative UTI balance deceases if AGNC's quarterly ERTI figure is less than the accrued quarterly dividend distributions figure.

O) Cumulative UTI and Net Dollar Roll Recalculation:

Cumulative UTI and net dollar roll is the running balance of AGNC's past undistributed ERTI and net dollar roll after management accrues for the company's quarterly dividend distributions. The cumulative UTI and net dollar roll balance increases if AGNC's quarterly ERTI and net dollar roll figure is more than the accrued quarterly dividend distributions figure. The cumulative UTI and net dollar roll balance deceases if AGNC's quarterly ERTI and net dollar roll figure is less than the accrued quarterly dividend distributions figure.

TEST 2 - Analysis and Results:

Using Table 3 above as a reference, I take AGNC's "cumulative UTI" figure (see red reference "M" in Table 3 above) and divide this amount by the quarterly "distributions to shareholders from ERTI" figure (see red reference "I" in Table 3 above). From this calculation, AGNC's "cumulative UTI coverage of quarterly dividend distributions ratio" is obtained (see red reference "N" in Table 3 above). This can also be referred to as AGNC's "UTI per share" amount. The higher this ratio (or per share amount) becomes, the more positive the results regarding AGNC's future dividend sustainability. Basically, this ratio/per share amount shows the amount of cumulative UTI covering the current quarter's dividend distributions (after taking the current quarter's dividend distributions accrual into account).

As was the case with TEST 1, TEST 2 showed a few negative signs during AGNC's second quarter of 2014 when excluding the company's net dollar roll. As of 3/31/2014, AGNC reported a cumulative UTI balance of $146 million. This balance was reduced to only $16 million as of 6/30/2014. As such, there was a material cumulative UTI decrease during the second quarter of 2014. Due to the fact there were no material repurchases of outstanding shares of common stock during the second quarter of 2014, AGNC still needed to achieve the relatively same quarterly ERTI "break-even" when compared to the prior quarter.

Since AGNC's current stock price continues to trade modestly to materially below the company's stated BV of $26.26 per common share as of 6/30/2014 (and more importantly, CURRENT BV), additional equity issuances will not occur (extremely low probability: dilution of BV). As such, AGNC's quarterly cumulative UTI break-even should not materially increase over the foreseeable future.

Now let us took a look at TEST 2 when including AGNC's net dollar roll. As was the case with TEST 1, TEST 2 showed a few positive signs during AGNC's second quarter of 2014 when including the company's net dollar roll. As of 3/31/2014, AGNC had a cumulative UTI and net dollar roll balance of $606 million. This balance was relatively unchanged at $615 million as of 6/30/2014. As such, there was a slight cumulative UTI and net dollar roll increase during the second quarter of 2014.

When AGNC reported a quarterly ERTI and net dollar roll figure of $0.67 per common share for the second quarter of 2014 (as mentioned in TEST 1 above), TEST 2 also showed no material signs of stress in regards to AGNC's future dividend sustainability. AGNC's cumulative UTI and net dollar roll coverage of quarterly dividend distributions ratio remained basically unchanged from a factor of 2.61 as of 3/31/2014 to a factor of 2.68 as of 6/30/2014. More importantly, this ratio has not decreased over the past three quarters. In direct correlation, AGNC's dividend per common share amount also has not decreased over the past three quarters.

From looking at the results from TEST 2, the probability of AGNC being able to maintain the company's current dividend of $0.65 per common share has also remained relatively unchanged when compared to the prior quarter. With that being said, PART 2 will discuss some recent topics/trends that may counter (or confirm) the evidence obtained within both TEST 1 and TEST 2 above. Now let us briefly analyze/discuss MTGE and NLY regarding the same general metrics.

Brief Analysis/Discussion of MTGE's and NLY's Dividend Sustainability (When Compared to AGNC):

Using Table 4 below as a reference, let us briefly compare AGNC to its sister company, MTGE, regarding TEST 1 and TEST 2.

Table 4 - AGNC Versus MTGE Dividend Sustainability Analysis (TEST 1 and TEST 2)

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(Source: Table created entirely by myself, partially using AGNC and MTGE data obtained from the SEC's EDGAR Database [link provided below Table 2])

Let us first discuss TEST 1. Using Table 4 above as a reference, when compared to AGNC, MTGE had a better quarterly ERTI per common share figure for the second quarter of 2014 (excluding each company's net dollar roll activity). AGNC had quarterly ERTI of only $0.28 per common share, while MTGE had quarterly ERTI of $0.45 per common share. AGNC had a quarterly underpayment (overpayment) of ($130) million, while MTGE had a quarterly underpayment (overpayment) of ($10) million for the second quarter of 2014. When calculated, this translated to AGNC having a quarterly payout ratio of 230%, while MTGE had a quarterly payout ratio of 145%.

However, let us now compare each company's results when net dollar roll activity is included. When compared to AGNC, MTGE had a worse quarterly ERTI and net dollar roll per common share figure for the second quarter of 2014. AGNC had quarterly ERTI and net dollar roll of $0.67 per common share, while MTGE had quarterly ERTI of $0.61 per common share. AGNC had a quarterly underpayment (overpayment) of $8 million, while MTGE had a quarterly underpayment (overpayment) of ($2) million for the second quarter of 2014. When calculated, this translated to AGNC having a quarterly payout ratio of 96%, while MTGE had a quarterly payout ratio of 107%. Therefore, when including the impacts from the net dollar roll, I believe AGNC slightly outperformed MTGE regarding TEST 1.

Now let us discuss TEST 2. Still using Table 4 above as a reference, when compared to AGNC, MTGE's cumulative UTI coverage of quarterly dividend distributions ratio was much better as of 6/30/2014 (excluding each company's net dollar roll activity). AGNC's cumulative UTI coverage of quarterly dividend distributions ratio was a factor of 0.07, while MTGE's ratio was a factor of 0.81 as of 6/30/2014.

However, let us now compare results when each company's net dollar roll activity is included. When compared to AGNC, MTGE's cumulative UTI and net dollar roll coverage of quarterly dividend distributions ratio was much worse as of 6/30/2014. AGNC's cumulative UTI and net dollar roll coverage of quarterly dividend distributions ratio was a factor of 2.68, while MTGE's ratio was a factor of 1.65 as of 6/30/2014. Therefore, when including the impacts from the net dollar roll, I believe AGNC outperformed MTGE regarding TEST 2 as well. Additional comparisons between AGNC and MTGE regarding future dividend sustainability will be provided in PART 2 of this article.

Just like AGNC and MTGE, NLY was able to stabilize the company's dividend during the first and second quarters of 2014. Since NLY continued to cut its quarterly dividend throughout various quarters during the past several years, the probability of the company being able to maintain the dividend at $0.30 per common share had modestly increased. This was mainly due to the material decrease in NLY's quarterly dividend distributions break-even amount. However, when NLY reported weak quarterly core earnings (the company's taxable income equivalent) of $0.23 per common share for the first quarter of 2014, some signs of stress rose once again in regards to its future dividend sustainability. NLY did not have a net long TBA MBS position during the first quarter of 2014. As such, NLY's weak core earnings for the first quarter of 2014 could not be offset by net dollar roll income (as was the case with AGNC).

When NLY reported stronger quarterly core earnings of $0.30 per share for the second quarter of 2014, the probability of the company being able to maintain its current dividend of $0.30 per common share increased. NLY's core earnings for the second quarter of 2014 was a positive sign for the company's future dividend sustainability. While AGNC had a quarterly ERTI and net dollar roll underpayment (overpayment) of $0.02 per common share (based on quarterly dividend distributions of $0.65 per common share), NLY had quarterly core earnings matching quarterly dividend distributions of $0.30 per common share. When calculated, AGNC and NLY had quarterly payouts of 96% and 101%, respectively.

Conclusions Drawn (PART 1):

To sum up all the information in PART 1 of this article, TEST 1 showed AGNC had ERTI available to common shareholders of only $100 million for the second quarter of 2014. However, when including activities within AGNC's net long TBA MBS position, the company had ERTI and net dollar roll of $238 million. Since AGNC had dividend distributions of ($230) million during the second quarter of 2014, this equated to an underpayment (overpayment) of $8 million and a payout ratio of 96%.

TEST 2 showed AGNC had a cumulative UTI coverage of quarterly dividend distributions ratio of only 0.07 as of 6/30/2014. Initially, this appeared to be a "red flag" per se for AGNC's future dividend sustainability. However, when including the net dollar roll being generated from AGNC's net long TBA MBS position, the company had a cumulative UTI and net dollar roll coverage of quarterly dividend distributions ratio of 2.68 as of 6/30/2014. This was a material difference, and I believe should be seen as a positive sign.

When looking at the results from TEST 1 and TEST 2, PART 1 has concluded the probability of AGNC being able to maintain the company's current dividend of $0.65 per common share has remained relatively unchanged when compared to the prior quarter. Due to the attractive yields and net dollar roll income being generated from AGNC's net long TBA MBS position, the company has stated its dividend will continue to be based on the earnings of the entire MBS portfolio (both on-balance sheet and off-balance sheet portfolios) for the foreseeable future.

Final Note: Based on the results shown in TEST 1 and TEST 2 above, I believe it is only prudent to include additional analysis regarding AGNC's future dividend sustainability. As such, PART 1 of this article is only a PARTIAL analysis of AGNC's dividend sustainability over the foreseeable future. Therefore, a "full" conclusion regarding AGNC's dividend sustainability will not be provided yet. PART 2 of this article will just pick up where PART 1's analysis ends. PART 2 of this analysis will discuss some additional topics/trends to consider in a general net rising (and falling) interest rate environment. PART 2 may counter (or confirm) the evidence obtained within PART 1 above. I believe the following four topics/trends should be addressed regarding a general net rise (and decline) in mortgage interest rates/U.S. Treasury yields and the impact on the future dividend sustainability of AGNC: 1) continued realignment of the company's MBS portfolio; 2) hedging costs (in particular periodic interest costs on interest rate swaps); 3) taxation impact of a net realized gain (loss) on MBS sales; and 4) taxation impact of a net long TBA MBS position. PART 2 of this article will be available to readers sometime next week.

Disclosure: The author is long AGNC, MTGE. 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. I have no position in NLY.

Source: American Capital Agency Corp.'s Dividend Sustainability Analysis (Post Q2 2014 Earnings) - Part 1