For those of you unfamiliar with my preferred Investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More importantly, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.
When considering the acquisition of AGNC Investment (NASDAQ:AGNC) preferred shares, AGNCB & AGNCP, it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.
Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to AGNC (which recently changed its name from American Capital Agency). Below is a snapshot of a slice of that page:
A quick review informs us that AGNC, listed as a REIT, primarily invests in agency pass-through securities and collateralized mortgages. It's also an asset manager and a large-cap company, which warms the cockles of this investor's heart.
Let's click on the Find Related Securities to examine any preferreds this company has to offer:
Here we learn that AGNC offers two preferreds (AGNCB & AGNCP), which are offered at respective interest rates of 7.75%, and 8.00%.
Now let's click on AGNCP itself. I'm particularly partial to investigating the preferred offering the highest coupon rate. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that most interests me:
- I like that this preferred is cumulative, meaning that in event that payments are suspended, they accumulate and are owed the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds. Although bank preferred dividends are usually secure, they are almost always non-cumulative, consequently, I don't buy them.
- These shares are callable at the company's option on 4/5/17 at $25.00 plus any accrued interest owed.
- They pay a dividend of $2.00 per share per year, or 0.50 per quarter, paid 1/15, 4/15, 7/15, 10/15 of each year.
- At the time of their IPO these shares were unrated by Moody or S&P, which really doesn't concern me, but might concern a more conservative investor.
- These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
- Dividends are not eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect you investment bottom line.
- As usual, preferreds upon liquidation, rank senior to commons and junior to debt, both secured and unsecured.
However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers and at least marginally understand a company's financial statements and conference calls. Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interest in mind rather than those of the preferred shareholder, which on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.
Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually begin with a five-year chart of its commons as shown below. For some reason my usual Yahoo Finance chart did not go back five years, consequently, I used the chart supplied by my IB trading platform as shown below:
Above is a screenshot of AGNC's 5 year chart, which, as far as I'm concerned is the picture of a company whose commons I'd rather not have owned over the past five years. The price of its shares during this time has trended in the wrong direction, falling from $29.00 on 12/9/11 to its current $18.65. However, during that time, AGNC has paid out $17.36 in dividends. Let's do the math:
- 29.00 - 18.65 = 10.35 loss + 17.36 gain = 7.01 profit/5 years
- 7.01/5 = 1.402/year
- 1.402/29.00(avg. cost per share in 12/9/2011)= 4.83% yield.
Not terrible, but certainly nothing to crow about. Now let's imagine that you bought AGNCP at its IPO par value of $25.00 on 3/29/12. You'd have earned a healthy 8% yield each year, and currently priced around its par value of $25.00. Okay, my bias is showing, I'm a fervent preferred investor.
However, before I go further into examining the preferreds of AGNC as a potential investment, I'd like to return to AGNC's financial highlights as provided by Finviz:
According to the Finviz summary of AGNC's financial highlights, this company is valued at $6.18 billion and has earned $164.00 million on $695.00 million in sales. Its book/share is 22.75, a tad more than its B/S. YTD 20.47%. Although its current D/E is reported at 5.42, its long-term is a surprising 0.07.
Because, as I illustrated above, as a long-term cumulative preferred investor, I am little concerned about quarterly financial reports and their attendant conference calls, which are liberally spun, I don't bother paying much attention to them unless the particular company is at risk of suffering some existential threat. AGNC is not one of those companies; therefore, it's time to determine if either of its preferreds are a buy at this time, and if so, which is the better buy.
And according to MarketWatch, let's see how those preferreds are priced now:
Now for those of you interested in owning one of AGNC's preferreds, let's do he math to determine which is the best buy at the current prices.
*This is a close call, which might take a bit of explaining. According to yield alone, AGNCP at the above price is the best buy. But there are other factors to consider. Although AGNCP's yield is slightly higher, it's currently priced above par value and callable 4/5/17, which is two payments away. Meaning that if the P Series is called immediately when callable, the investor would lose 0.11 per share because he bought his preferreds 0.11 above par value, which would reduce his profit by that 0.11/share.
However, I don't expect this to happen because, more often than not, preferred issues are not called when callable, and might not be called for years. Consequently, if the P remains uncalled as I suspect it might, it remains the best buy. However, if it's called promptly the B, in retrospect, was the best buy. The one thing we can be certain of, the P will be called first, not necessarily because it's callable first, but as I mentioned above, it simply costs the company more in payments per share.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.