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Overview

At the close of 2011, American Capital Agency Corp. (AGNC) had one class of equity investor, for which management held $27.71 per share in assets on which management earned a net interest rate spread of 1.94%, with about 8x leverage. The first quarter of 2012 shows management has raised the common shareholders' net asset value per share ("NAV") about 4.8% over the quarter to $29.05, while paying common shareholders a dividend of $1.25 (about 4.5% of the quarter's starting NAV, or a bit over 4.4% of the quarter's starting price of $28.16) - while protecting the future outlook by increasing the net interest spread to 2.07% at the end of the quarter. Adding the $1.25 dividend and the $1.35 NAV increase, management gave shareholders $2.60 over the quarter - a return which, whether measured from the quarter's starting NAV or its share price, easily exceeds 9%.

The 9% isn't an annualized return. That's a quarterly return.

Outstanding Strategy Supports Outstanding Returns

American Capital Ltd. (ACAS) uses several strategies to improve returns at its publicly-traded managed funds. American Capital Agency reported today, and American Capital Mortgage Investment (MTGE) will report later this week; sharing the same management, investors should expect certain similarities between the companies' performance. Both companies to improve returns through tax deferral that leads to NAV increases. Returns are occasionally amplified with accretive share issuance. At American Captial Agency, returns are also enhanced by the benefit to common shareholders deriving from the new preferred issuance. These return-magnifying techniques benefit all long-holding shareholders. For an illustration of their effect over time, consider Fig. 5 from American Capital Agency's 2011 Annual Report:

(click to enlarge)

Conclusion

American Capital Agency begins the second quarter of 2012 with more equity and a better net interest spread on which to earn income for common shareholders. The existence of a new class of owner with returns capped at an 8% dividend and no rights in increasing per-share asset accretion also improves the outlook for common shareholders, though the modest preferred share count prevents this impact from being particularly large at present. The larger message to common shareholders is that management continues to succeed in achieving returns well in excess of those needed to maintain the current dividend, while demonstrating willingness to explore innovative ways to improve overall returns.

Source: American Capital Agency's Q1 Performance