In an earlier article on American Capital Mortgage Investment Corp. (NASDAQ:MTGE), the company was pitched as a "buy" because of three major factors. The company's sister fund - the agency-only mREIT American Capital Agency Corp. (NASDAQ:AGNC), which shares the same managers from American Capital Ltd. (NASDAQ:ACAS) - a strong track record of growing net asset value per share and paying a double-digit dividend at the company's. Hope for repeat performance wasn't the major selling point, however.
Since its launch during 3Q2011, the company quickly progressed from paying 20¢ per share on stub-quarter earnings of 25¢ (including taxable income of 17¢) to paying 80¢ per share - at which point it was described here as "worth more than its dividend." The first full quarter's results showed that the 80¢ dividend was again substantially less than its full earnings ($1.72 per share, including $1.07 in taxable income), and that book value had grown over the quarter by 91¢.
This means that in the company's initial partial-quarter, it reinvested 20% of its earnings (paying only 80%), then in its first full quarter reinvested over 53% of earnings (paying less than 47% of earnings in dividends). The reinvestment means American Capital Mortgage's income-generating (and dividend-supporting) capacity has been increasing. And at 20% and 53% of total earnings, the reinvestment is not only a substantial portion of the company's total return, but a basis for growing that return. At least, that was the argument in January and February.
This week - with most of the quarter behind us and an unknown net asset value increase built into the shares - American Capital Mortgage announced that it will increase its dividend more than 12% from the prior quarter, to 90¢ per share for the first quarter of 2012. In response, shares traded steadily up as the market's impression of the company began to reflect the company's performance:
Based on the company's recent history, the 90¢ dividend is not the primary benefit of share ownership. The 90¢ is the first installment of a stream of reinvested earnings shareholders will enjoy for years. The company's manager American Capital Ltd. doesn't hold 2 million shares in the expectation the stock is going to decline, after all, and the manager's track record at American Capital Agency Corp. speaks for itself.
Recent price moves from a discount to net asset value (in January) to a slight net asset value premium (in February) have placed American Capital Mortgage Corp. at a premium of about 13% to its last-published NAV, which based on its performance last quarter may be a premium fo 10% or less to current NAV.
And as pointed out previously, that NAV may grow even faster: American Capital Ltd. has a history of above-NAV share issuance at American Capital Agency Corp., which historically has increased the post-transaction NAV of prior shareholders. American Capital Mortgage has filed with the SEC papers indicating follow-on offerings, and pre-issuance shareholders stand to gain by getting in before the transaction's impact on NAV is appreciated by the market.
In summary: American Capital Mortgage Investment Corp. has grown NAV and grown its dividend exactly as predicted here. The latest dividend increase has generated some recent excitement, but the real excitement should follow the earnings releases showing just how much money the company is not paying in dividends, but instead reinvests for shareholders at the end of the quarter.
Planting the seeds of dividend growth is a consistent strategy of the company's manager, visible over the years its sister company has been traded, and should suggest to investors that their total return is rather in excess of the current yield calculated solely from the shares' quarterly dividend. Moreover, the company has not yet benefited from post-IPO above-NAV issuance, despite that accretive issuance has been a repeated growth strategy of the company's manager in its other publicly traded fund.