American Capital Agency Corp. (NASDAQ:AGNC) is a real estate investment trust (REIT) that invests in agency mortgage-backed securities. Agency securities are guaranteed by the U.S. Government through Government-sponsored entities such as Fannie Mae (OTCQB:FNMA) and Freddie Mac (OTCQB:FMCC).
(Click charts to expand)Click to enlarge
REITs tend to trade as a multiple of book-value as opposed to a multiple of current earnings like most stocks. AGNC currently trades at 1.14x book value, which is inline with historical valuations.Click to enlarge
Compared with its mortgage REIT peers, we believe that AGNC currently offers investors a phenomenal risk-adjusted return of 19.0%. In general, REITs that invest in agency securities (as opposed to non-agency securities) tend to trade at a higher premium to book-value as their portfolios are viewed as less risky due to the inherent government guarantee. However, investors should be aware that most agency REITs tend to utilize more leverage than their non-agency peers.The chart below plots dividend yield and price-to-book value for each REIT. Note: Marker sizes are based on market capitalization. Click to enlarge Parsimony’s Position
But until the economy improves in a sustained and material way we will likely continue to hold Annaly Capital Management (NYSE:NLY) and AGNC.