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American Capital Agency (NASDAQ:AGNC) recently offered a $1.2-billion secondary offering to raise additional funds. Based upon the temporary share weakness due to the secondary, AGNC shares presently offer a 19.4% annual dividend. This is based upon the current $1.40-quarterly dividend.

Ex-Dividend Date
AGNC closed at $29.80 on June 20th. Investors had to own AGNC on June 20th in order to qualify for the second quarter $1.40-per share dividend. June 21st was the ex-dividend date.

AGNC closed at $28.50 on June 21st, reflecting the fact that new shareholders would not qualify for the dividend.

Secondary Offering
On June 22nd, AGNC's management announced a secondary offering. The terms of the sale were 43,200,000 shares of common stock for an estimated gross proceeds of approximately $1.2 billion. This amounts to approximately $27.78 per AGNC share.

On June 23rd, the market soaked up the offering and AGNC closed at $28.64 on June 23rd.

AGNC Valuation
The AGNC 2nd quarter conference call, expected to be announced in the third week of July, will provide valuable details on MREIT leverage and operating margins. AGNC's 1st quarter conference call was April 26th. Short term Treasury Bill borrowing rates have decreased and long-term bond valuations have increased since the 1st quarter, 2011. AGNC should experience a net unrecognized capital gains on their long-term Government Sponsored Entities (GSE) holdings.

I have projected, in the below table, an expected AGNC book value (BV) per share based upon a 3.44% net BV increase and a 7.1% net BV increase. I used these two sensitivity analysis figures based upon prior increases in AGNC book values. Assuming a 7.1% net book value change, AGNC BV will be $27.80. Historically, AGNC common stock has traded at a minimum of 110% of AGNC BV. This valuation would suggest AGNC could trade at a $30.58 minimum valuation per share.

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ACAS Involvement in AGNC
American Capital (NASDAQ:ACAS) owns 2,500,100 shares in AGNC. ACAS was an early backer of AGNC. Due to this relationship, ACAS receives monthly management fees totaling an annual 1.25% of AGNC's general equity. The wording is found in the AGNC 10K, page 9: :

ACAS, operating as a Business Development Corporation (BDC), has a vested interest in AGNC issuing as many secondary offerings as possible. As long as the AGNC secondary offerings are accretive to AGNC shareholders, then AGNC shareholders should continue to prosper in collaboration with ACAS shareholders.

Disclosure: I am long AGNC.

Source: MREIT American Capital Agency's Secondary Provides a 19% Yield