The Q2 2011 financial results are long published, but one thing grabbed my attention about mREIT American Capital Agency Corp (AGNC). Its book value per share, quoted at around $26.76 in June of this year, is up from $25.96 in March.
Needless to say, this is quite close to the current market value of the stock: $28.62 as of Thursday morning, August 25. Additionally, the market price has gone down by around 2.22% in the last six months.
Now, who cares about all these numbers? As investors, we just want to know if it's a "buy," "hold," or "sell." So let’s get to the point: The market is rough, and since people are showing diminished confidence in the US economy, I would say the price drop - almost on par with the book value - is just an after-effect of the current bearish sentiment. But will AGNC make it and come out as a survivor? For that, we must check the company’s financials.
The most important thing to check with any REIT that invests in mortgage-backed securities, collateralized mortgage obligations and government-sponsored securities (that is to say American Capital Agency) is its asset yield. We want to see its assets yielding more and more, so that as investors, our income goes up. If there's not direct income, there must be possibility of healthy capital gains over time.
In the company’s balance sheet, the asset yield is reported at 3.35% last quarter, down from 3.39% in Q1 this year. Yes, I see an increase in the total asset value, up by around $14.48 billion, leading to an increase of around $72.1 million in net interest income in the last quarter. But perhaps due to the drop in the price of the assets, the asset yield has gone down too -- something for which to blame the market.
Could the company be building its asset base so it can dispose of the non-performing assets over time? That seems to be a logical move. And in fact, it is a necessary one, not only because of the volatile market, but also due to the fact that the return on assets of 1.96% is not quite up to the market, compared to MFA Mortgage Investment’s 2.9%, Hatteras Financial’s 2.02% and the industrial average of 4.6%, as reported last quarter. The return on equity, which ultimately shows investors’ returns, has dropped to 18.8% this quarter from 22.5% in Q1, which is bad news. Things need to change.
The debt-to-equity ratio seems to be controlled, which is a big factor in the return on equity. It must be remembered, though, that the company has remained constant on its dividend payout, so things must be positive inside the shell. All I want to see is an increase in the asset yield rate in the next quarter, which will clarify how the company is faring, and how it may fare in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.