In my earlier article (check this out), I attempted to explain how Annaly Capital (NLY) could benefit with continued monetary easing by the Fed. In this article, I will state my opinion on why American Capital (AGNC) will continue outperforming NLY with more Fed action.
American Capital has been able to grow its business by using significantly more leverage than NLY. This has enabled it to maintain a higher dividend as it continue to book greater profits. That being said, it did cut its dividend in the previous quarter from $1.40/share to $1.25/share, apparently coming from the deleveraging efforts and the secondary stock offerings that the company had employed.
Now, it has announced that the $1.25/share dividend will remain the same for this dividend cycle, and it is my belief that it will be able to maintain this dividend for at least the next several quarters.
The Most Likely Fed Actions
While many scenarios have been bandied about, the two most likely actions that the Fed will take, are the same ones it has taken previously.
- It could extend the zero interest rate policy (ZIRP) well into 2015, giving the entire mREIT sector another year of being able to obtain cheap money. (it may even cut the remaining .25% down to zero)
- The Fed will once again be a buyer of longer term Treasuries in an effort to keep those rates down, or even lower.
In each of these scenarios, AGNC could continue to profit with its business model. it MIGHT be able to extend even more leverage than it currently have, but I do not believe that will happen. It is more likely that it will stay at its current level of leverage and that would mean the dividend being paid now, will be more secure.
In this chart we can see how AGNC has grown since 2008. From around $15.00/share back then, to nearly $36.00/share today, AGNC has outperformed mightily in this sector. One hundred thirty percent capital appreciation is remarkable for this sector but shows how well its management team has navigated the interest rate environment using more leverage than NLY.
Putting it bluntly, it has eaten Annaly's lunch over the course of the last few years. More importantly for shareholders has been its dramatic increase in dividends. From $.33/share to the current $1.25/share has put huge smiles on the faces of those investors who have gotten in early on this sector leader.
To be fair, Annaly has what I consider to be, the best management team with the most experience in all interest rate environments. For those looking for less risk and a more conservative approach, NLY has fit the bill longer than any other company.
On the other hand, greater returns has been the hallmark of American Capital, and given the current environment, and the anticipated Fed actions, will continue to take the leadership position.
I can see further increases in the share price, and almost a certainty that the current dividend level can be maintained.
I bought into AGNC recently and am considering adding to my position based on the Fed actions.