After the markets closed on September 11, American Capital Agency Corp (AGNC) reported that it will maintain its quarterly dividend at $1.25 per share for the third quarter of 2012. The dividend is payable on October 26, 2012 to shareholders of record as of September 21, 2012, with an ex-dividend date of September 19, 2012, or next Wednesday. Investors will be pleased to hear that the dividend was maintained, as dividend cuts have proliferated throughout the asset class over the last year.
American Capital Agency is a mortgage REIT that buys agency mortgages that are backed by federal agencies. Other well-known agency mREITs include Annaly Capital Management (NLY) and Hatteras Financial (HTS). Index funds for mREITs include the FTSE NAREIT Mortgage REITs Index ETF (REM) and the Market Vectors Mortgage REIT Income ETF (MORT), though these ETFs also have exposure to non-agency mortgage REITs.
Earlier this year, on February 6, AGNC announced a dividend policy cut, lowering the quarterly payout to $1.25 from 1.40 per share. That was a 10.71% dividend cut, reducing the mREIT's dividend from about 19% to about 17%. Prior to that reduction, AGNC had maintained its prior $1.40 dividend for ten quarters.
The company indicated it would be able to maintain its $1.25 quarterly payout for the next few quarters, and also indicated that the Fed's low rate policy extension should be conducive to the mREIT's near-term success. Since then, AGNC has kept to its word and maintained that dividend rate.
Last month, AGNC reported comprehensive Q2 income of $480 million, or $1.58 per share, and a net loss of $261 million, or $0.88 per share. American Capital Agency also reported that its net book value per share totaled $29.41 at the end of the second quarter, an increase of $0.35 from the end of Q1.
American Capital Agency reported that its average asset yield decreased 59 bps to 2.73%, from 3.32% in Q1. The REIT's annualized weighted average portfolio yield was 2.91%, compared to 3.14% in Q1, and its average asset yield was 2.81, a 25 basis point decline from 3.06% in Q1. The company noted that the decline in average asset yield was due to a combination of an increase in forecast prepayment speeds and a decline in the average coupon on AGNC's portfolio. American Capital Agency also reported that its cost of funds increased during the quarter primarily due to a higher ratio of interest rate swaps to repurchase agreements and other debt outstanding.
AGNC's average spread for the second quarter was 1.65%, a decrease of 66 bps from 2.31% in Q1. The company noted that if it excluded the impact of "catch-up" premium amortization charges due to changes in projected CPR estimates, the spread was 1.83% for the current quarter, a 30 bps decrease from 2.13% in the first quarter. At the end of Q2, AGNC's average net interest rate spread was 1.62%, a decrease of 45 bps from 2.07% at the end of Q1.
American Capital Agency also reported that its leverage ratio was 7.6x at the end of Q2, down from 8.4x at the end of the first quarter, and that its average leverage for the quarter was 7.5x. This is the lowest leverage rate that AGNC has reported in the last year.
American Capital Agency offers one of the highest yields among all mREITs, and possibly the highest yield within publicly-traded, agency-only mREITs. Nonetheless, AGNC shares contain significant leveraged interest rate risk, which could become an issue if and/or when interest rates ever begin to substantially rise. In the meanwhile, AGNC shareholders continue to receive significant payouts while also recognizing substantial gains on their shares. Since the start of 2012, AGNC shares have appreciated by about $7.58 (or about 27%), while also paying out $2.50 in dividends (or about 7%). Shareholders who hold on for at least another week will receive yet another $1.25 (or 3.5%), but should note that mREIT dividends are taxed as income and not at the lower corporate dividend rate.
Disclosure: I am long NLY.