American Capital Agency Corp. (AGNC) announced a share buyback program today, and it comes on the heels of a similar announcement a week or two ago by Annaly Capital Management (NLY). While we are waiting for NLY's quarterly results, we can use the AGNC earnings announcement to do some calculations to see the underlying strategy.
Since we have the most recent quarterly data on AGNC, we can estimate it first: The share buyback will be $500M, and will be done when the selling price of the stock is less than book value, which it is at the moment. This will have the added effect of supporting the stock price at or about the book value per share.
At the current dividend rate of $1.25 per share per quarter, and using the most current figures from the earnings announcement on leverage and interest rate spread, the calculation of the effects of this buyback is as follows:
|Approx Share Repurchase Price||$32.49|
|Shares to be Repurchased||15,389,351|
|Dividend Per Share/Quarter||$1.25|
|Current Interest Spread||1.42%|
|Reduced Interest Income||$49,700,000.00|
|Net Benefit of Buyback||$27,246,753|
At the current dividend rate of $1.25 per share, the share buyback will result in a reduced dividend payout of $76M per year, and with the most recently announced interest rate spread of 1.42%, the reduction in portfolio will reduce AGNC's interest income by about $50M, so the net benefit of the share buyback will be around $27M.
Since NLY has not revealed its quarterly data yet, we will have to make estimates based on last quarter, but here is the calculation:
|Est Share Repurchase Price||$16.00|
|Shares to be Repurchased||93,750,000|
|Dividend Per Share/Quarter||$0.50|
|Est. Current Interest Spread||1.30%|
|Reduced Interest Income||$117,000,000|
|Net Benefit of Buyback||$70,500,000|
Based on expectation of NLY's lower leverage, and also smaller interest rate spread, the net benefit of the share buyback will be on the order of $75M over the course of the year. NLY's share buyback will take place over the next 12 months, and will probably also be used to support the share price at some level approximating the book value.
Both of these announcements reflect what we already know about the mREIT industry: The interest rate spreads are continuing to decline. The AGNC interest rate spread dropped from 1.65% to 1.42%, and on that basis we would expect NLY to come in at around 1.30%. These two companies cannot make money by doing share issuances, like they have for most of the last two years, and instead, will turn to lower cost sources of money, such as preferred stock, to raise capital if needed.
The good news on this is that both of these companies have an opportunity to support the price of their stocks.
The question of the day is, whether an investor will be better off with a shrinking common stock dividend and a shrinking share price, or a lower dividend and stable share price (the Preferred Stock option).
As we wait for NLY's earnings announcement to confirm our above estimates, that question will be worth considering again.
Keep in mind that the world is full of chaos, and there are no guarantees on anything.
Disclosure: I am long AGNC.