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"I would like to take you seriously, but to do so would be an affront to your intelligence."

George Bernard Shaw

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

  • By investing exclusively in fixed rate agency securities that are implicitly guaranteed by the U.S.
  • They have a very savvy management team that has so far done an excellent job in terms of looking out for shareholder 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.
  • There are very few companies that offer such a high yield with relatively low risk. The current yield is 16.63%.

Reasons to be bullish on American Capital Agency Corp:

  • Government credit risk is limited.
  • Earnings are projected to rise to $4.95 in 2013.
  • A good free cash flow of $352 million.
  • A very strong quarterly revenue growth of 64%.
  • A robust quarterly earnings growth rate of 51.2%.
  • A good 5 year ROE average of 18.5%.
  • Total 3 year return of 172%.
  • Net income increased from $119 million in 2009 to $770 million in 2011.
  • EBITA increased from $155 million in 2009 to $1.137 billion in 2011.
  • Annual EPS before NRI increased from $5.17 in 2009 to $5.21 in 2011.
  • Sales increased from $174 million in 2009 to $1.135 billion in 2011.
  • A great 5 year dividend average of 19.14%.
  • A very strong 5 year dividend growth rate of 35%.
  • It has a very strong free cash flow yield of 15.25%.
  • Its portfolio of government back security is relatively liquid.
  • $100K invested for 5 years would have grown to $247K; if the dividends were reinvested the rate of return would be much higher.

(Click to enlarge)

Many key ratios will be covered in this article and investors would do well to get handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

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 payout ratio over 100% indicates that the company is paying out more money to shareholders than 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 some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is 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 - Sina: A Good Play, But Better Plays Abound.

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 jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditure, then its free flow is $300 million. If the share price is $100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one 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.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - 5 Covered Write Plays: Federal Realty Investment Trust is our top choice.

Company: American Capital Agency

Free cash flow= $352 million.

Basic Key ratios

Percentage Held by Insiders = 0.04

Growth

1. Net Income ($mil) 12/2011 = 770

2. Net Income ($mil) 12/2010 = 288

3. Net Income ($mil) 12/2009 = 119

4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 167.42

5. Quarterly Net Income this Quarterly/same Quarter year ago = 51.15

6. EBITDA ($mil) 12/2011 = 1137

7. EBITDA ($mil) 12/2010 = 394

8. EBITDA ($mil) 12/2009 = 155

9. Net Income Reported Quarterly ($mil) = 209

10. Annual Net Income this Yr/ Net Income last Yr = 167.43

11. Cash Flow ($/share) 12/2011 = 5.18

12. Cash Flow ($/share) 12/2010 = 4.13

13. Cash Flow ($/share) 12/2009 = 5.22

14. Sales ($mil) 12/2011 = 1135

15. Sales ($mil) 12/2010 = 383

16. Sales ($mil) 12/2009 = 174

17. Annual EPS before NRI 12/2009 = 5.17

18. Annual EPS before NRI 12/2010 = 4.39

19. Annual EPS before NRI 12/2011 = 5.21

20. Quarterly Earnings Growth = 51.2%

21. Quarterly Revenue Growth = 64.4%

(Click to enlarge)

Dividend history

1. Dividend Yield = 16.63

2. Dividend Yield 5 Year Average 12/2011 = 19.14

3. Dividend Yield 5 Year Average 09/2011 = 19.14

4. Annual Dividend 12/2011 = 5.6

5. Annual Dividend 12/2010 = 5.6

6. Forward Yield = 16.63

7. Dividend 5 year Growth 12/2011 = 35.61

Dividend sustainability

1. Payout Ratio 06/2011 = 1.07

2. Payout Ratio 5 Year Average 12/2011 = 1.2

3. Payout Ratio 5 Year Average 09/2011 = 1.2

4. Payout Ratio 5 Year Average 06/2011 = 1.2

5. Change in Payout Ratio = -0.12

Performance

1. Percentage Change Price 52 Weeks Relative to S&P 500 = 0.91

2. Next 3-5 Year Estimate EPS Growth rate = 2

3. EPS Growth Quarterly(1)/Q(-3) = -109.23

4. ROE 5 Year Average 12/2011 = 18.51

5. Return on Investment 06/2011 = 16.39

6. Debt/Total Cap 5 Year Average 12/2011 = 1.27

7. Debt/Total Cap 5 Year Average 09/2011 = 1.27

8. Debt/Total Cap 5 Year Average 06/2011 = 1.27

9. Current Ratio 06/2011 = 0.06

10. Current Ratio 5 Year Average = 0.05

11. Quick Ratio = 0.06

12. Cash Ratio = 0.03

13. Interest Coverage Quarterly = 1.75

Valuation

1. Book Value Quarterly = 27.71

2. Price/ Book = 1.09

3. Price/ Cash Flow = 5.81

4. Price/ Sales = 8.37

5. EV/EBITDA 12 Mo = 6.48

Company: Chimera Invest (NYSE:CIM)

Free cash flow = $418 million

Basic Key ratios

Percentage Held by Insiders = 0.19

Growth

1. Net Income ($mil) 12/2011 = N/A

2. Net Income ($mil) 12/2010 = 533

3. Net Income ($mil) 12/2009 = 324

4. EBITDA ($mil) 12/2010 = 286

5. EBITDA ($mil) 12/2009 = 275

6. Annual Net Income this Yr/ Net Income last Yr = 64.47

7. Cash Flow ($/share) 12/2010 = 0.3

8. Cash Flow ($/share) 12/2009 = 0.41

9. Sales ($mil) 12/2010 = 583

10. Sales ($mil) 12/2009 = 299

11. Annual EPS before NRI 12/2008 = -1.9

12. Annual EPS before NRI 12/2009 = N/A

13. Annual EPS before NRI 12/2010 = 0.66

14. Annual EPS before NRI 12/2011 = N/A

Dividend history

1. Dividend Yield = 15.77

2. Dividend Yield 5 Year Average 12/2011 = 12.68

3. Dividend Yield 5 Year Average 09/2011 = 12.68

4. Annual Dividend 12/2011 = 0.51

5. Annual Dividend 12/2010 = 0.69

6. Forward Yield = 15.77

7. Dividend 5 year Growth 12/2011 = 26.72

Dividend sustainability

1. Payout Ratio 5 Year Average 12/2011 = 0.99

2. Payout Ratio 5 Year Average 09/2011 = 0.99

3. Payout Ratio 5 Year Average 06/2011 = 0.99

Performance

1. Percentage Change Price 52 Weeks Relative to S&P 500 = -32.39

2. Next 3-5 Year Estimate EPS Growth rate = 8.5

3. EPS Growth Quarterly(1)/Q(-3) = 146.67

4. ROE 5 Year Average 12/2011 = 14.57

5. ROE 5 Year Average 09/2011 = 14.57

6. ROE 5 Year Average 06/2011 = 14.57

7. Debt/Total Cap 5 Year Average 12/2011 = 39.27

8. Debt/Total Cap 5 Year Average 09/2011 = 39.27

9. Debt/Total Cap 5 Year Average 06/2011 = 39.27

10. Current Ratio 5 Year Average = 0.22

11. Quick Ratio = 0.03

12. Cash Ratio = 0

13. Interest Coverage Quarterly = N/A

Valuation

1. Price/ Book = 0.85

2. Price/ Cash Flow = 9.42

Notes

It would fall under the category of "below average." $100K invested for six years would have shrunk to $32K; without the dividend payment it would have shrunk to $17K.

Company: CYS Investments (NYSE:CYS)

Free cash flow = $-4.7 billion

Basic Key ratios

Growth

1. Net Income ($mil) 12/2011 = 292

2. Net Income ($mil) 12/2010 = 22

3. Net Income ($mil) 12/2009 = 64

4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 1203.91

5. Quarterly Net Income this Quarterly/same Quarter year ago = 355.35

6. EBITDA ($mil) 12/2011 = 345

7. EBITDA ($mil) 12/2010 = 34

8. EBITDA ($mil) 12/2009 = 68

9. Net Income Reported Quarterlytr ($mil) = 44

10. Annual Net Income this Yr/ Net Income last Yr = 1203.84

11. Cash Flow ($/share) 12/2011 = 2.28

12. Cash Flow ($/share) 12/2010 = 1.2

13. Cash Flow ($/share) 12/2009 = 1.69

14. Sales ($mil) 12/2011 = 233

15. Sales ($mil) 12/2010 = 76

16. Sales ($mil) 12/2009 = 46

17. Annual EPS before NRI 12/2008 = 2.33

18. Annual EPS before NRI 12/2009 = 1.96

19. Annual EPS before NRI 12/2010 = 1.89

20. Annual EPS before NRI 12/2011 = 1.7

Dividend history

1. Dividend Yield = 15.08

2. Dividend Yield 5 Year Average 12/2011 = 15.04

3. Dividend Yield 5 Year Average 09/2011 = 15.04

4. Annual Dividend 12/2011 = 2.25

5. Annual Dividend 12/2010 = 2.35

6. Forward Yield = 15.08

Dividend sustainability

1. Payout Ratio 06/2011 = 1.2

Performance

2. Percentage Change Price 52 Weeks Relative to S&P 500 = 4.63

3. EPS Growth Quarterly(1)/Q(-3) = -153.33

4. Return on Investment 06/2011 = 13.08

5. Debt/Total Cap 5 Year Average 12/2011 = 0

6. Debt/Total Cap 5 Year Average 09/2011 = 0

7. Debt/Total Cap 5 Year Average 06/2011 = 0

8. Current Ratio 06/2011 = 0.01

9. Current Ratio 5 Year Average = 0.03

10. Quick Ratio = 0.01

11. Cash Ratio = 0

12. Interest Coverage Quarterly = 4.93

Valuation

1. Book Value Quarterly = 13.02

2. Price/ Book = 1.02

3. Price/ Cash Flow = 5.82

4. Price/ Sales = 6.36

5. EV/EBITDA 12 Mo = 4.26

Notes

It would fall under the category of "good."

Company: Resource Capital (NYSE:RSO)

Free cash flow = $-56 million

Basic Key ratios

1. Percentage Held by Insiders = 4.71

2. Number of Institutional Sellers 12 Weeks = 1

Growth

1. Net Income ($mil) 12/2011 = 38

2. Net Income ($mil) 12/2010 = 19

3. Net Income ($mil) 12/2009 = 6

4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 93.95

5. Quarterly Net Income this Quarterly/same Quarter year ago = 104.41

6. EBITDA ($mil) 12/2011 = 30

7. EBITDA ($mil) 12/2010 = 14

8. EBITDA ($mil) 12/2009 = 6

9. Net Income Reported Quarterlytr ($mil) = 0

10. Annual Net Income this Yr/ Net Income last Yr = 93.98

11. Cash Flow ($/share) 12/2011 = 0.41

12. Cash Flow ($/share) 12/2010 = 0.88

13. Cash Flow ($/share) 12/2009 = 0.84

14. Sales ($mil) 12/2011 = 125

15. Sales ($mil) 12/2010 = 104

16. Sales ($mil) 12/2009 = 98

17. Annual EPS before NRI 12/2007 = 1.72

18. Annual EPS before NRI 12/2008 = -0.12

19. Annual EPS before NRI 12/2009 = 1.22

20. Annual EPS before NRI 12/2010 = 1.15

21. Annual EPS before NRI 12/2011 = 0.56

Dividend history

1. Dividend Yield = 15.24

2. Dividend Yield 5 Year Average 12/2011 = 22.31

3. Dividend Yield 5 Year Average 09/2011 = 22.31

4. Annual Dividend 12/2011 = 1

5. Annual Dividend 12/2010 = 1

6. Forward Yield = 15.24

7. Dividend 5 year Growth 12/2011 = -14.1

Dividend sustainability

1. Payout Ratio 06/2011 = 1.56

2. Payout Ratio 5 Year Average 12/2011 = 1.3

3. Payout Ratio 5 Year Average 09/2011 = 1.3

4. Payout Ratio 5 Year Average 06/2011 = 1.29

5. Change in Payout Ratio = 0.26

Performance

1. Percentage Change Price 52 Weeks Relative to S&P 500 = -21.21

2. Next 3-5 Year Estimate EPS Growth rate = 5

3. EPS Growth Quarterly(1)/Q(-3) = 190.91

4. ROE 5 Year Average 12/2011 = 13.35

5. ROE 5 Year Average 09/2011 = 13.35

6. ROE 5 Year Average 06/2011 = 13.21

7. Return on Investment 06/2011 = 2.15

8. Debt/Total Cap 5 Year Average 12/2011 = 85.66

9. Debt/Total Cap 5 Year Average 09/2011 = 85.66

10. Debt/Total Cap 5 Year Average 06/2011 = 85.67

11. Current Ratio 06/2011 = 89.45

12. Current Ratio 5 Year Average = 179.15

13. Quick Ratio = 89.45

14. Cash Ratio = 8.4

15. Interest Coverage Quarterly = 1.41

Valuation

1. Book Value Quarterly = 5.54

2. Price/ Book = 0.95

3. Price/ Cash Flow = 12.75

4. Price/ Sales = 4.22

5. EV/EBITDA 12 Mo = 68.68

Notes

It falls under the category of "average." $100K invested for 7 years would have shrunk to $89K; without the dividend it would have shrunk to 54K.

Company: DDR Corp (NYSE:DDR)

Levered Free Cash Flow = 265.34M

Basic Key ratios

1. Percentage Held by Insiders = 1.5

2. Number of Institutional Sellers 12 Weeks = 7

Growth

1. Net Income ($mil) 12/2011 = -16

2. Net Income ($mil) 12/2010 = -209

3. Net Income ($mil) 12/2009 = -357

4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 92.43

5. Quarterly Net Income this Quarterly/same Quarter year ago = 106.18

6. EBITDA ($mil) 12/2011 = 448

7. EBITDA ($mil) 12/2010 = 348

8. EBITDA ($mil) 12/2009 = 237

9. Net Income Reported Quarterlytr ($mil) = 5

10. Annual Net Income this Yr/ Net Income last Yr = 92.43

11. Cash Flow ($/share) 12/2011 = 1.02

12. Cash Flow ($/share) 12/2010 = 0.37

13. Cash Flow ($/share) 12/2009 = -0.02

14. Sales ($mil) 12/2011 = 771

15. Sales ($mil) 12/2010 = 803

16. Sales ($mil) 12/2009 = 819

17. Annual EPS before NRI 12/2007 = 1.28

18. Annual EPS before NRI 12/2008 = -0.86

19. Annual EPS before NRI 12/2009 = -1.91

20. Annual EPS before NRI 12/2010 = -0.8

21. Annual EPS before NRI 12/2011 = 0.02

Dividend history

1. Dividend Yield = 3.35

2. Dividend Yield 5 Year Average 12/2011 = 4.75

3. Dividend Yield 5 Year Average 09/2011 = 4.75

4. Annual Dividend 12/2011 = 0.22

5. Annual Dividend 12/2010 = 0.08

6. Forward Yield = 3.35

7. Dividend 5 year Growth 12/2011 = -51.28

Dividend sustainability

1. Payout Ratio 06/2011 = 1.45

Performance

2. Percentage Change Price 52 Weeks Relative to S&P 500 = 0.92

3. Next 3-5 Year Estimate EPS Growth rate = 22.2

4. EPS Growth Quarterly(1)/Q(-3) = 7-100.00

5. ROE 5 Year Average 12/2011 = 0.41

6. ROE 5 Year Average 09/2011 = 0.41

7. ROE 5 Year Average 06/2011 = 0.94

8. Return on Investment 06/2011 = 1.58

9. Debt/Total Cap 5 Year Average 12/2011 = 61.92

10. Debt/Total Cap 5 Year Average 09/2011 = 61.92

11. Debt/Total Cap 5 Year Average 06/2011 = 61.9

12. Current Ratio 06/2011 = 1.1

13. Current Ratio 5 Year Average = 1.15

14. Quick Ratio = 1.1

15. Cash Ratio = 0.64

16. Interest Coverage Quarterly = 0.5

Valuation

1. Book Value Quarterly = 9.76

2. Price/ Book = 1.47

3. Price/ Cash Flow = 13.99

4. Price/ Sales = 5.01

5. EV/EBITDA 12 Mo = 18.7

Notes

It falls under the category of "good."

Conclusion

Even though the markets have pulled back a little bit, they are still extremely overbought and need to let out some steam. Prudent investors would do well to wait for a strong pullback before committing funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

Disclaimer

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: 5 Interesting REITs: American Capital Agency Our Top Choice

Additional disclosure: EPS, and EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com.