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I am long NLY and increased my holdings of AGNC as of this morning. Dec 5, 2012
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I've been interviewed on the Nationally Syndicated "George Jarkesy" Radio Show http://bit.ly/N3UhWX Aug 16, 2012
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I have a new article on AGNC and NLY pending. Aug 5, 2012
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Update: The Future Price Of AGNC Raw Data
1. Current course, Stable spread
Dividend Yield Calculations: I updated the "current" dividend yields to reflect the 1.25 dividend that AGNC declared in the second quarter.
Disclosure: I am long AGNC.
Additional disclosure: I am also long ARR, CYS, IVR, TWO
Raw Data: The Future Price Of AGNC
Thanks for clicking on this. Here is my rationale:
Each quarterly stock issuance raises capital. The amount is based on the number of shares and the offering price.
The capital can be applied at a given leverage rate, as indicated in the financials for AGNC, to expand the portfolio. The company can then use the portfolio at the interest rate spread, which last quarter was 2.31% to derive the income.
It can and will distribute the income in the form of dividends at a known rate.
Leverage:
If you calculate this on the basis of the table on page 56 of the AGNC annual report and calculate the amount of funds raised during 2011 and compare that to the change in portfolio value, the result is reasonably close to the average 7.86:1 leverage value that is stated in AGNC's investor fact sheet. Using the leverage to compute the amount of incremental portfolio that AGNC can add with each incremental share issuance, we can then use the interest rate spread data to compute the amount of income that can be derived from the portfolio:
Income derived from the increased portfolio:
We have to make a couple of adjustments. If we multiply the portfolio value by the interest rate spread, we get a number that is slightly different from the actual net interest income, and there is a similar adjustment when translating from net income to actual dividend payout:
Here is the spreadsheet model I've used:
These are the independent variables:
Income efficiency is the ratio of "theoretical net income", which is the portfolio value times the interest rate spread, and "actual net income" from the financials. The reason there is a difference is the interest expense and other operating expenses.
The dividend payout ratio is relatively straightforward. It's the average percentage that is paid out in dividends.
Interest Stability: I built the model to test what would happen in scenarios of increasing or decreasing interest rate spread. 1.0 is no change, 1.02 is a 2% increase in spread, .98 is a 2% decrease, for example.
Yield Stability is the same thing: 1.0 is steady yield, using the initial assumption of 18%, 1.02 would be a 2% increase, .98 would be a 2% decrease. A decrease in yield is not all bad, it represents an increase in the stock price.
Here's the first half of the data table:
and here is the second half:
The model price is the output I used for the graphs in the main article.
Here is Scenario 1, the base case;
Scenario 2: Decreasing interest rate spread
Scenario 3:
Scenario 4: Increased Leverage
5. Decaying Yield (stock price steadily going up)
41.59550363
Do with this information what you will.
Disclosure: I am long AGNC.
Air Products Earnings Improvement after Potential APG takeover
Airgas has no debt and approximately $400M in STA expense per quarter:
The difference between ARG's gross profit and their PBT is about $1.5B, which is roughy their annual STA expense.
The opportunity is for Air Products to roughly double its stock price if it can take Airgas' gross operating margin and not take all of its STA.
Naturally, the selling and distribution systems of ARG cannot be completely shut down but even if 25% of it can be reduced, it amounts to an additional $20 on the stock price of Air Products, even valued at their current PE.
At Praxair's PE the benefit in the stock price would be even higher.