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Basic Overview

American Capital Agency Corp. (NASDAQ:AGNC) invests exclusively in fixed rate agency securities that are implicitly guaranteed by the US government. This limits its credit risk. It is among a select group of companies that has increased its dividends during the economic crisis.

American Capital Agency Corp. funds its investments primarily through short-term borrowings structured as repurchase agreements. It has elected to be taxed as a REIT under the Internal Revenue Code of 1986. As a REIT, the company would not be subject to federal income tax, provided it distributes at least 90% of its taxable income to its shareholders. It is externally managed by American Capital AGNC Management, LLC, which is an affiliate of American Capital, Ltd. American Capital Agency Corp. was founded in 2008 and is based in Bethesda, Maryland.

Reasons to be bullish on American Capital Agency Corp

  • By investing exclusively in fixed rate agency securities that are implicitly guaranteed by the US government its credit risk is limited.
  • Its portfolio of government back security is relatively liquid.
  • They have a very savvy management team that has so far done an excellent job in terms of looking out for shareholder's interests. As of its public offering in May 2008, it has paid over $1.3 billion in dividends.
  • AGNC uses swaptions to protect itself against lower interest rates that might lead to early prepayment.
  • Earnings are projected to rise to $4.95 in 2013.
  • There a very few companies that offer such a high yield with relatively low risk. The current yield is 16.3%.

Additional factors

  • A strong free cash flow of $1.06 billion.
  • A very strong quarterly revenue growth of 64%.
  • A robust quarterly earnings growth rate of 51.2%.
  • Total 3 year return of 199%.
  • Net income has been generally trending upwards for the past few years.
  • Even though payout ratios are not important when it comes to REITS it is good to see that its current payout ratio is 13% below its 5 year average of 120%.
  • A good price to free cash flow ratio of 19.5.
  • A great 5 year dividend average of 19.21%.
  • A very strong 5 year dividend growth rate of 42%.
  • It has a very strong free cash flow yield of 14.72%.

Investors would be best served if they got a handle on some of the following key ratios as many of them will be used in this article.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest 5 Dividend Champs With Excellent Yields

Debt to Equity Ratio is found by dividing the company's total amount of long-term debt (debts with interest rates that have a maturity longer than one year) by the total amount of equity. A debt to equity ratio of 0.5 tells us that the company is using 50 cents of liabilities in addition to each $1 dollar of shareholders equity in the business. There is no fixed ideal number as it depends on the industry the company is in. However, in general a ratio under 1 is acceptable and ideally it should be in the 0.5-0.6 ranges.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardising their future earnings. Ideally the company should have a ratio of 1 or higher.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Quick ratio or acid -test is obtained by adding cash and cash equivalents plus marketable securities and accounts receivable dividing them by current liabilities. It is a measure of a company's ability to use its quick assets (assets that can be sold of immediately at close to book value) to pay off its current liabilities immediately. A company with a quick ratio of less than 1 cannot pay back its current liabilities. Additional key metrics are addressed in this article, "Is Potash Corp. Of Saskatchewan A Good Long-Term Dividend play."

American Capital Agency Corp

Industry : REITs

Free cash flow= $1.06 billion.

Performance

Qtrly Earnings Growth = 51.2%

Qtrly Revenue Growth = 64.4%

Total return for the past 3 years = 199.44%

Total return for the past 5 years = N/A

Total return for the past 12 months = 27.41%

Growth

Net income for the past three years

Net Income - 2011 = $119 million

Net Income - 2010 = $288 million

Net Income - 2009 = $770 million

Net income- 2008 = $35.3 million

EBITDA ($mil) 12/2011 = $1137

EBITDA ($mil) 12/2010 = $394

EBITDA ($mil) 12/2009 = $155

Sales ($mil) 12/2011 = $1135

Sales ($mil) 12/2010 = $383

Sales ($mil) 12/2009 = $174

Dividend Sustainability

Total cash flow from operating activities

2008 = $30.69 million

2009 = $93.23 million

2010 = $-19.62 million

Payout Ratio 12/2011 = 107%

Payout Ratio 5 Yr Avg 12/2011 = 120%

Change in Payout Ratio = -12%

Other Key Important Ratios

Price to Sales = 6.37

Price to Book = 1.11

Price to Tangible Book = 1.1

Price to Cash Flow = 5.91

Price to Free Cash Flow = 19.5

Quick Ratio = 0.06

Current Ratio = 0.06

LT Debt to Equity = 0

Total Debt to Equity = 0.01

Interest Coverage = 1.75

Inventory Turnover = N/A

Asset Turnover = 0.02

Dividend yield 5 year average = 19.21

Dividend rate = $ 5.45

Dividend growth rate 3 year avg = 37.97%

Dividend growth rate 5 year avg = 42.59

Paying dividends since = 2008

Total return last 3 years = 199.44%

Related companies (peer group analysis)

Invesco Mortgage Capital Inc. (NYSE:IVR)

Industry : REITs

Free cash flow= $231 million

Net income for the past three years

Net Income - 2011 = $15 million

Net Income - 2010 = $98 million

Net Income - 2009 = $287 million

Total cash flow from operating activities

1900 = $0 million

2009 = $11.48 million

2010 = $71.53 million

Dividend yield 5 year average = 14.55

Dividend rate = $ 3.42

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 0 years

Paying dividends since = 2009

Total return last 3 years = N/A

Total return last 5 years = N/A

Two Harbors Investment Corp (NYSE:TWO)

Industry : REITs

Free cash flow= $109 million

Net income for the past three years

Net Income - 2011 = $-9 million

Net Income - 2010 = $36 million

Net Income - 2009 = $127 million

Total cash flow from operating activities

1900 = $0 million

2009 = $-11.37 million

2010 = $33.12 million

Dividend yield 5 year average = N/A

Dividend rate = $ 1.60

Dividend growth rate 3 year avg = 0%

Dividend growth rate 5 year avg = N/A

Consecutive dividend increases = 1 years

Paying dividends since = 2009

Total return last 3 years = 46.28%

Total return last 5 years = N/A

Chimera Investment Corp (NYSE:CIM)

Industry : Finance Intermediaries & Services

Free cash flow= $418 million

Net income for the past three years

Net Income - 2011 = $324 million

Net Income - 2010 = $533 million

Net Income - 2009 = $N/A million

Total cash flow from operating activities

2008 = $30.67 million

2009 = $168.69 million

2010 = $305.59 million

Dividend yield 5 year average = 12.55

Dividend rate = $ 0.51

Dividend growth rate 3 year avg = 1.24%

Dividend growth rate 5 year avg = 32.02

Consecutive dividend increases = 0 years

Paying dividends since = 2007

Total return last 3 years = 55.85%

Total return last 5 years = N/A

MFA Financial, Inc. (NYSE:MFA)

Industry : REITs

Free cash flow= $332 million

Net income for the past three years

Net Income - 2011 = $268 million

Net Income - 2010 = $270 million

Net Income - 2009 = $316 million

Total cash flow from operating activities

2009 = $269.97 million

2010 = $245.94 million

2011 = $334.41 million

Dividend yield 5 year average = 10.89

Dividend rate = $ 0.99

Dividend growth rate 3 year avg = 8.35%

Dividend growth rate 5 year avg = 25.82

Consecutive dividend increases = 0 years

Paying dividends since = 1998

Total return last 3 years = 79.88%

Total return last 5 years = 59.31%

Conclusion

There are many REITS out there, but we believe that American Capital Agency Corp is one of the best plays out there. It has an excellent management team, offers a very good yield. Its credit risk is limited risk as it only invests in government-backed paper, and it has delivered from day one. It is one of the few REITS that is currently trading at a new 52-week high. 100k invested in American Capital Agency Corp just four years would have more than doubled in size to 236K. We would wait for American Capital Agency Corp pullback before opening new positions.

As the markets are extremely overbought we would wait for a strong pullback before opening up new positions.

Important facts investors should be aware in regards to investing and REITS

Payout ratios are not that important when it comes to REITS as they are required by law to pay a majority of their cash flow as dividends. Payout ratios are calculated by dividing the dividend rate by the net income per share, and this is why the payout ratio for REITS is often higher than 100%. The more important ratio to focus on is the cash flow per share. If one focuses on the cash flow, one will see that in most cases, it exceeds the dividend declared per share.

Performance and EPS surprise charts were obtained from zacks.com Earning Vs expectations were sourced from smartmoney.com. Earning and growth estimates charts sourced from dailyfinance.com. Free cash flow yield and income from continuing operations charts sourced from ycharts.com

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: American Capital Agency Corp: A Good Long-Term Yield Play