Seeking Alpha

American Capital Agency slashes dividend by 24%

  • American Capital Agency (AGNC) cuts its dividend by $0.25 to $0.80 per share. Annualized, it's a 13.5% yield based on today's close of $23.79.
  • The company also announces it's repurchased 11.9M shares thus far in Q3 - about 3% of the float - at an average price of $22.16.
  • Is the dividend cut more than priced in? Share are up marginally AH.
  • Press release.
Comments (71)
  • dhdhoora
    , contributor
    Comments (438) | Send Message
     
    Interesting that $.80 is close to Scott Kennedy's (best SA author following AGNC) 'worst case scenario' with respect to Q3 dividends. However, cash is being used to buy back shares which should bode well for future dividends and price appreciation in AGNC.

     

    Not great news, but AGNC has the best management in the mREIT business and these guys will win long term.

     

    All the very best,
    Don
    19 Sep 2013, 05:58 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi dhdhoora,

     

    I just complimented Scott in the thread of his article. He is hands down the best analyst I have ever seen.

     

    I totally agree with your comments. Scott has also mentioned several times that he sees AGNC raising their dividend in 2014.

     

    My comments on his article also ask him a question about a future raise.

     

    There should be some good comments from Scott tonight. See you over there later. Thanks for your comments.

     

    AGNC still trading up after hours, large dividend cut fully priced in or the SHARE BUYBACK was overwhelmingly positive.
    19 Sep 2013, 07:34 PM Reply Like
  • lstahler
    , contributor
    Comments (165) | Send Message
     
    Who is Scott that you referring to? I just bought AGNC
    20 Sep 2013, 12:59 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    HI dhdhoora,

     

    I appreciate the kind words.

     

    Nice summary of thoughts regarding the declaration as well.

     

    Scott
    20 Sep 2013, 06:37 AM Reply Like
  • Alex Trias
    , contributor
    Comments (721) | Send Message
     
    Nice call on the dividend cut. Your analysis on AGNC's dividend has been spot on - not surprising given the depth of your analysis. Overall, though, I'm pleased that AGNC has been buying back their stock while it's trading below NAV. If they continue to do so (as they have said they will), then further dividend cuts in the near term could continue. AGNC's application of earnings towards dividends or buybacks appears highly dependent on their stock price - which is very difficult to predict. Makes your job a bit tougher, I'd say. As a longer term investor in AGNC, though, I see the buybacks as highly preferable to dividends - paying 75 cents to buy a dollar is good business, and longer term should support higher dividends.
    20 Sep 2013, 09:41 AM Reply Like
  • ksaeed
    , contributor
    Comments (19) | Send Message
     
    I could live with lower dividends for a couple of quarters if the book value and share price go back up some :)
    20 Sep 2013, 12:43 PM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Alex,

     

    Thanks for the positive feedback.

     

    Very well stated comment.
    20 Sep 2013, 08:12 PM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    repurchased $263mn or 68c/share (new count). amortize that over say 4 quarters and its equiv to a 97c div but they reinvested 17c/share for shareholders (like it or not!)....so think of it as an alternative to stringing out four small cuts on the way to 80c (our sustainable #) by late '14 -- get it over with but reward long-term holders with low buys vs BV...mild positive but should be interesting where the new yield trades...
    19 Sep 2013, 05:58 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (522) | Send Message
     
    Ouch! In the past several months, I have been adding to my position to get my cost basis down. It turns out that I needed all the additional shares to maintain an acceptable dividend income level !

     

    VTFI
    19 Sep 2013, 06:00 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Easy does it VTFI,

     

    This is only 1 quarter's worth of dividend payments. We are long term investors. We will be happy when the dividend INCREASES in 2014. Keep the faith. Even IF the dividend stays where it is, we are getting over a 13% yield on our money.

     

    AGNC is trading up after hours ($23.85) at 7:42 pm. Lets see what happens over the next several quarters.
    19 Sep 2013, 07:44 PM Reply Like
  • very_thirsty_for_income
    , contributor
    Comments (522) | Send Message
     
    This is bitter medicine. Hopefully it is just that and AGNC performs well next year.

     

    VTFI
    19 Sep 2013, 06:04 PM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    Hope, will not save us!
    20 Sep 2013, 11:19 AM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Disclosure. I sold my 3000 shares at 21.5 at a loss because I am OUT of the sector. I'm astounded, still, by the almost cult-like following these stocks have. They dropped their dividend AGAIN by another 24%, yet posters treat it like good news because "Gary Kain and AGNC management are the best in the biz" and "now we can wait for good things to come in 2014" Huh? In my twenty five years of investing, I've never seen so many people whistling in the dark.

     

    I'll say it again: These are VERY complex instruments which are HIGHLY leveraged. No one understand what will happen to these stocks and their dividends because there are too many unknowns.

     

    Unbelievable. Even ARR posters are looking at the cut from .07 to .05 as "good news". Wow.
    19 Sep 2013, 06:08 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2616) | Send Message
     
    You sold at the bottom (so far), the dividend cuts have been drastic, but that share repurchase program really kicked into high gear. The shares were yielding 20% for a long time. That implied certain levels of risk. Now we see those risks. If spreads start to widen as the interest rate environment normalizes, these instruments should be able to easily make doubt digit returns. There is a lot of new volatility, but counseling ppl to bail now seems counter productive.

     

    And if you want cult-like, read a few discussions of TSLA or LINE haha
    19 Sep 2013, 08:13 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Phattboy43,

     

    I have read a few of your comments. You seem too emotional to own AGNC. This is not a cult like following. I have accumulated a substantial amount of shares of AGNC at a weighted average cost per share of $24.87. So as of now I have an UNREALIZED LOSS of about 4% based on the current price (trading at $23.85 after hours as I type).

     

    My intentions are to be a LONG TERM INVESTOR, with my main GOAL to collect the dividends for my wife and I to live off of. I recently retired and have enough cash to live on for another 3 quarters. So, I will reinvest the AGNC dividends until we need them to meet our expenses.

     

    Did I just take a REDUCTION is potential income because of the dividend cut today, OF COURSE I did. Does it bother me, yes and no. Yes, because human nature hates to see cuts, or decreases in dividends and potential income. HOWEVER, I am a REALIST.

     

    I know that the mREIT environment is very challenging at this point in time. I also know that the MARKET has a way of rewarding PATIENT investors. AGNC will make money as they rebalance their portfolio. You need to take a position before the mREIT environment becomes good again.

     

    If you can not stomach the volatility you should invest in blue chip stocks. MO is my most stable dividend payer. It keeps my portfolio well balanced.

     

    Even though AGNC has been hit hard in 2013 and KMR has been under fire lately, I am still + in 2013 with an outstanding dividend income. I started 2013 with only 3 stocks, AGNC,KMR and MO and I am + in 2013. I am ASTOUNDED that my 3 stock portfolio has stood up to a beating and is still (up +) YTD.

     

    My dividend income based on the $1.05 dividend for AGNC was about 75- 80% above our expenses. Now with the reduction to .80 cents my dividend income is STILL about 50% above our expenses. These are estimates, however my point is that my dividends still far exceed our expenses, even after the 24% cut to the AGNC dividend, which means, at this level, I can live off about 75% of my the dividends and still reinvest approximately 25% of my dividend income.

     

    You might disagree with my viewpoint, but I guess that's what makes a market. Good luck to you.
    19 Sep 2013, 08:22 PM Reply Like
  • RWMostow
    , contributor
    Comments (1435) | Send Message
     
    Dividends-

     

    As a retiree, I'd settle for 13% any day (or 10% for that matter).

     

    Those not happy with 13% are invited to sell their holdings and go with highly regarded Family Dollar Stores (FDO) which pays a whopping 1.4% (Yahoo Finance).

     

    Long: AGNC

     

    -rwm
    19 Sep 2013, 08:39 PM Reply Like
  • Cash King
    , contributor
    Comments (793) | Send Message
     
    Dividends,

     

    Agree with you. mREITs are volatile and not for everyone. I hope to be where you are in five to ten years. Nevertheless, best of luck to you and definitely will follow you and interested to see how you are doing.
    19 Sep 2013, 08:45 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi RWMostow,

     

    I believe we are in a very good investment that few understand.

     

    Read Scott Kennedy's articles on AGNC. He has a wealth of information and understands AGNC. Good luck to you.
    19 Sep 2013, 08:51 PM Reply Like
  • RWMostow
    , contributor
    Comments (1435) | Send Message
     
    Dividends-

     

    I am following Scott and appreciate his insight and efforts.

     

    Good luck to you as well. Thank you.

     

    -rwm
    19 Sep 2013, 09:03 PM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi Cash King,

     

    Thanks.

     

    Keep focused on your goals and you will reach them. I have had lots of mentors in my life, some teach me what to do and others teach me what not to do by the way they live and conduct themselves.
    19 Sep 2013, 09:34 PM Reply Like
  • lstahler
    , contributor
    Comments (165) | Send Message
     
    I am basically trying to help others (living on retirement income)invest in companies that pay high dividends that are reliable.
    20 Sep 2013, 12:57 AM Reply Like
  • lstahler
    , contributor
    Comments (165) | Send Message
     
    Yeah, I really am amazed how investors are so ready to invest in companies that pay spit or zero in dividends. Why bother?
    20 Sep 2013, 12:58 AM Reply Like
  • lstahler
    , contributor
    Comments (165) | Send Message
     
    OK, but where are you putting your money now?
    20 Sep 2013, 12:59 AM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Sorry...one more point. No one knows what the ten year treasury will do. Do these companies hedge? Not hedge. A week ago it was almost at 3%. Now back down. Ben does not control this. If you are leveraged 7-10x you better be sure. These companies minted money for three years when interest rates were basically LOCKED at 1.5%.

     

    Even the companies which did NOT lower their dividends like NYMT were just lucky because their portfolios happened to be properly adjusted to the interest rate environment.
    19 Sep 2013, 06:13 PM Reply Like
  • xxavatarxx
    , contributor
    Comments (2615) | Send Message
     
    Phattoy, I don't think NYMT was lucky.
    They just happen to invest assets that aren't leveraged and hog tied to MBS.
    They are not an agency mreit.
    19 Sep 2013, 06:19 PM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Thanks xxavatarxx. I understand the clear difference. My point is, there are too many variables in these stocks which are completely out of management's control. No one can guess which way they will go based on any kind of traditional analysis.
    19 Sep 2013, 06:26 PM Reply Like
  • seth1066
    , contributor
    Comments (54) | Send Message
     
    Interest rate goes up for money; mortgage interest rate goes up correspondingly. Of course, you have to bring the new higher rate instruments into the mix.
    19 Sep 2013, 06:26 PM Reply Like
  • Cavalaw
    , contributor
    Comments (123) | Send Message
     
    Phattboy43

     

    Your comment would be consistent if you DO believe that the REITs industry is going out of business at some point in the future..ARR,AGNC NLY etc etc....Keep in mind that their business model requires payment of a high ( 9 to 10 percent minimum) dividends...if they cant pay that , their business fails...i Reits can't pay peanuts ..its that simple. Maybe that will happen. or maybe not. who knows.?...
    But if you dont think so , your comment is counterintuitive...in the long term for reits. it s either recovery of book value, price and dividends OR go bust altogether
    19 Sep 2013, 06:27 PM Reply Like
  • Cash King
    , contributor
    Comments (793) | Send Message
     
    I think the divy cut is a temporary pain but the share repurchases sure boost long term potential. Divys are cheaper with less shares. Note also that the mREITs that bought back shares all bought when they were low. Good use of capital in my opinion.
    19 Sep 2013, 07:29 PM Reply Like
  • Left Banker
    , contributor
    Comments (2125) | Send Message
     
    Got into AGNC for the first time a few weeks ago http://bit.ly/1a8coBV.

     

    Grabbed the opportunity yesterday near the close to sell for about 13% profit on the anticipation of a big dividend drop today. Looked sweet to me for 3 weeks return.

     

    I'm surprised a bit at the after-hours action. This could turn out better than expected for AGNC longs.

     

    I still like AGNC. If it falls over the next few sessions, I'll buy back in. Maybe after ex-date next week (was it announced today? I didn't see it.).
    19 Sep 2013, 08:18 PM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Dividends#1. Thanks for your comment. I am in your same boat. about to retire. I still have my company and income but am figuring out how to live without those two. I'm always amazed why many retirees believe they must live on CD's, money market funds and bonds when there are a TON of stable, high-yielding stocks/etf's and BDC's. I own a lot of MO as well. TONS of PSEC. I am actually not risk averse and have held a ton of mREITS. My point to everyone is......MO is a long term play. KO is a stock for the long haul. Hell even my biggest hold PSEC (a BDC) is probably a long term play. PSEC has declared their 11.5% dividend through next APRIL 2014. With mREITS, people keep talking as though there is some guarantee things are looking up. "oh, yeah, what a great move....they didn't mess around and prolong it...they cut it right to .80 cents. Man that Gary Kain is a class act". They paid .80 cents because THAT'S ALL THEY COULD AFFORD TO PAY!!! And there is no indication it won't be lowered again next quarter.

     

    I'm simply pointing out, for last 1.5 years at least, AGNC and most other mREITS, agency and non-agency, have had a shrinking BV, dividend and stock price. Period. Sorry if I have offended anyone, and good luck to all. Nothing presently is showing anything but more of the same. Nothing in their press release said "things have turned around and from here on out it's blue skies." am I missing something?
    19 Sep 2013, 10:19 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2616) | Send Message
     
    Phat,

     

    AGNC BV has not been shrinking for the last 6 quarters. BV was increasing thru 9/30/2012, and has only taken a large hit in the last few months. They didnt only pay 80 cents because it was "all they could afford to pay" they bought back $200m+ worth of shares in the quarter.

     

    You ask what you are missing. What you are missing is facts and the ability to look past the headline.
    20 Sep 2013, 12:25 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi Phattboy43,

     

    I can understand your point of view. You sound as though you are doing well and will have your retirement income covered.

     

    I will continue to study AGNC and keep my eye on it. I am comfortable owning it. Good luck to you in your upcoming retirement. I am enjoying ZERO pressure days. My business was loaded with pressure, my stress level has gone from a 10 to a 4. I am leading a healthier life. Vacation to Spain with my wife in 2014 Retirement is good!
    20 Sep 2013, 10:34 AM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Dividends#1

     

    Sounds like a great time. Good luck to you as well. No pressure is a GOOD thing. Life is too short. As Jim Morrison said "no one here gets out alive".
    20 Sep 2013, 12:09 PM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi readers,

     

    What I think people are missing is the tax implications of the TBA MBS for Q3 2013. I know a few readers know my views about AGNC's net long TBA MBS position in the past (ever since they increased their net long position in Q1 2013 while rates began to rise).

     

    In Q2 2013, they unloaded 50% of their TBA MBS long position (at less than desired prices; conversion to regular MBS). This caused specific negative estimated REIT taxable income transactions. AGNC most likely continued to decrease their net long TBA MBS balance into Q3 2013. This $0.25 per share dividend cut seems to support these facts.

     

    AGNC usually does not like to change the quarterly dividend rate each quarter. However, this quarter had specific transactions which affected their quarterly estimated REIT taxable income. I'm not saying the TBA MBS transactions alone caused the $0.25 per share decrease. However, it was the cause of at least half of the decerase.

     

    One of the most important figures to watch for when they report their Q3 2013 results is the "off balance sheet" amount of their net long TBA MBS position as of 9/30/2013. If they follow in MTGE's footsteps (which I feel they will), this balance should again have a material decrease. Ultimately, this spells good news regarding taxable income implications.

     

    The dividend cut also continues with their notion of having a "cautious" cumulative UTI surplus balance. Each quarter won't have these special set of circumstances if management understands how these instruments affect taxable income.

     

    Also, technically AGNC could have easily paid a higher dividend b/c they repurchased over $250 million worth of stock. They could have repurchased less shares and instead distributed a higher amount to shareholders. However, as stated in their quarterly SEC disclosures, AGNC's main regard to shareholders is the preservation of BV. Usually, this trumps a potentially higher dividend.

     

    Pure dividend investors will not like this and I can definitely understand that. However, the buyback and cautious UTI surplus have longer-term positive BV implications.

     

    The material cut wasn't the BEST news, but wasn't the WORST either. I personally would have been concerned if they declared the $0.80 per share dividend and NO share buybacks.

     

    Management knew the larger than expected cut would be seen as negative. That's exactly why they also stated the material share buyback with the dividend declaration.

     

    Just my personal thoughts on the declaration. All good thoughts and potential concerns in the above comments.

     

    Scott
    19 Sep 2013, 10:24 PM Reply Like
  • Left Banker
    , contributor
    Comments (2125) | Send Message
     
    Scott,

     

    Thank you for that. I hope that you will be preparing something in detail on the current state of AGNC.
    19 Sep 2013, 10:27 PM Reply Like
  • degolyer
    , contributor
    Comments (19) | Send Message
     
    Scott,
    Your earlier analyses prepared careful readers very well for AGNC's range of actions. The share buybacks actually made your worse case scenario for div cuts, as you point out above, not as bad as it could have been. While I prefer dividends over share repurchases, share repurchases do position AGNC for a stronger 2014 and they do preserve capital value for investors if they need to cash out. Your articles and comments really help us to understand management's reasoning and options, so thanks once again from yet another reader for your extremely valuable work here on SA.
    19 Sep 2013, 11:02 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2616) | Send Message
     
    Scott,

     

    Keep up the great work.
    20 Sep 2013, 12:26 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Left Banker,

     

    I won't be doing an AGNC article for at least a few weeks.

     

    The next article regarding AGNC will be part 1 of the Q3 2013 IS estimation article.

     

    Between now and then, I'll be doing a PSEC (BDC sector) article.
    20 Sep 2013, 06:40 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi degolyer,

     

    I appreciate the positive feedback and taking the time out to write a comment.

     

    Scott
    20 Sep 2013, 06:41 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Mike,

     

    Thanks for the comment / feedback.

     

    Scott
    20 Sep 2013, 06:41 AM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    heh scott...the way i look at it they could have either

     

    a) returned capital (principle) to shareholders keeping div level the same

     

    b) used the capital to buy MBS (rolling over proceeds) at market value

     

    c) buy back shares to effectively buy MBS that are on their books at 85c on the $

     

    seems like c was the best for long-term shareholders....i think the Fed tipped their hand this week and are specifically looking at not upsetting the MBS funding apple-cart. The last thing u want to do when u are trying to wean the market off of fannie/freddie is to blow up private finance..ok, last part was conjecture but the no-taper was a signal imho
    20 Sep 2013, 07:31 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi Scott,

     

    In my estimation after reading everything you just wrote, absorbing the ramifications of the new dividend of .80 cents, the buyback of 11.9M shares and the UTI surplus, everything points to a dividend increase either next quarter or the one after.

     

    IF the next 7 trading days to close out Q3 are favorable to AGNC, it appears they might have a decent Q3.

     

    Lastly, it appears that AGNC has accomplished some stability by all their recent actions. 1) Fully hedged portfolio 2) decrease of the dividend to .80 cents 3) Buyback of 11.9M shares at an average price of $22.16 which can put a floor in the price, if they increase their buyback program another $350M +, that would give them the ability to buy another $500M worth of shares if the price was right. 4) unloading the net long TBA MBS and re rolling their portfolio to perform better in a rising interest rate environment

     

    Maybe all these moves will DECREASE the volatility in AGNC's stock price. Your thoughts?

     

    PS: I know if interest rates spike that would increase volatility in AGNC's stock price, however it seem less likely at this point in time.
    20 Sep 2013, 08:51 AM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    divs - i wudn't bank on any div increases soon. The 80c looks about right in a stable interest rate environ -> interest + rolldown. I imagine they will (re)bulk up UTI a bit since they won't have to pay it out until latter half 2014 (when '13 returns are due). Also, don't expect buybacks unless we trade at 85% or less vs NAV and even there there is a limit with leverage....so in a nutshell I think you have to ask yourself is are you happy with the yield and are comfortable with rates not shooting up like they did over the last 6 months....cheers
    20 Sep 2013, 08:57 AM Reply Like
  • Dividends#1
    , contributor
    Comments (2771) | Send Message
     
    Hi Douglas,

     

    I think AGNC has navigated some very challenging interest rate moves (100bp + spike higher) and positioned themselves very well for the future.

     

    I believe dividend increases will happen sometime in 2014, maybe early 2014, maybe mid 2014, maybe late 2014. BV will increase.

     

    As far as buybacks go, I stated in my comment above that AGNC would do more IF THE PRICE WAS RIGHT.

     

    My main question to Scott, was about the volatility of AGNC's stock price DECREASING, not about dividend increases or buybacks.
    20 Sep 2013, 09:53 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Douglas,

     

    Nice overall comment / response.

     

    I agree with all you have stated.

     

    Yes, MBS markets are currently happier from the FED decision (including mortgage originators).

     

    The "spike" in rates last quarter was over a 50% increase in most Treasury maturities. That's a massive move. Mortgages rates also proportionally jumped which made the entire homebuilding sector extremely "cautious". Instead of focusing on their normal course of operations, they had to keep an eye out regarding interest and cancellation rates as well (more than desired anyways).

     

    Even if this is just a 3-month break until the FED starts tapering, it's a positive indicator regarding the mREIT sector in general. The main negative that affects the mREIT sector is the SPEED of the moves. We saw this in Q2 2013.

     

    Again, nice comment Douglas. Scott
    20 Sep 2013, 08:22 PM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Dividends,

     

    Valid points and considerations.

     

    In a slow, gradual interest rate rise, I still feel a dividend increase will occur in the latter half of 2014.

     

    HOWEVER, this could change depending on the TBA MBS activities. I first want to see what they did with this account in Q3 2013. As stated in my past articles and comments in this thread above, I believe this was the major reason for the larger than anticipated cut (with the buyback as another factor).

     

    I'll state my reasoning for this assumption. AGNC and MTGE had extremely similar MBS portfolios as of 6/30/2013 regarding types of MBS, coupons, and maturities (as stated in past articles). Also, they have extremely similar derivative and hedging portfolios. However, the ONE MAIN EXCEPTION between the two companies were the TBA MBS balances. MTGE, since it's a much smaller entity market cap. wise, was able to convert their net long TBA MBS positions to regular MBS positions prior to the end of Q2 2013. AGNC had a much larger TBA MBS portfolio ($ wise) and didn't covert the entire position by 6/30/2013.

     

    As such, it makes sense MTGE only had a dividend cut of $0.10 per share (or 12.5%) while AGNC had a dividend cut of $0.25 per share (or 24%) (since they had extremely MBS and derivative / hedging portfolios).

     

    Regarding AGNC's future dividend, I personally could see the $0.80 per share dividend being raised to $0.90 per share next quarter and have it maintained there for several quarters.

     

    Again, I can't solidify this projection until Q3 2013's results are released. However, this is what I'm currently gearing towards. The TBA MBS taxation implications SHOULD be a one/two quarter event. Again, this all gets back to management's understanding of the taxation implications of these specific instruments.

     

    For all newer readers reading these threads, these general points are in the following article I wrote a few weeks ago:

     

    http://bit.ly/17W7uZ8

     

    Thanks,
    Scott
    20 Sep 2013, 08:38 PM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Thanks Scott. As usual, spot-on analysis. I disagree on one point. Indeed they do state preservation of book value is of primary importance. However, I do not believe they would CHOOSE to lower the dividend in light of the fact it is primarily a dividend play. 50% of the company is owned by institutions who own it for income. Sure, preservation of capital, but mainly for income. I find it hard to believe a conversation/debate took place where Gary Kain and other executives said "man, you know....I think we really COULD keep our all important dividend the same, but I say we really screw with private investors' and the institution's confidence and cut it by 24% so we can buy back shares". Not realistic in my opinion.

     

    Good luck and I look forward to reading your next piece.
    19 Sep 2013, 10:36 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2616) | Send Message
     
    Buying back shares below book is accreative to book value. They've reduced the dividend several other times in the last 2 years, why would they consider it impractical to lower it now?

     

    Please do some reading on the industry, and how buybacks are better for shareholders than dividends when a financial stock trades below book.

     

    Also please explain why they chose to spend $200+ mil on buybacks if they did not want to "CHOOSE" to lower their dividend. If Mr. Kain and the BOD did not have a conversation about lowering the dividend, where did they get the hundreds of millions of dollars to buy back the shares?
    20 Sep 2013, 12:31 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Phattboy43,

     

    I appreciate the first comment about the analysis.

     

    Also, you state some valid statements / counterpoints.

     

    In my past article's comment section, I state WHY the dividend was less than anticipated ($0.10 less than I projected in a past article). Since AGNC's BV vs. dividend is discussed here, I'll talk about this topic here as well and add to my previous thoughts.

     

    I projected an exact quarterly dividend of $0.90 per share and AGNC reported a $0.80 per share dividend. I personally felt the $0.10 deficit was from the quarterly share buybacks. I anticipated a quarterly share buyback of 3 million shares and they bought back 11.9 million shares. As such, the two basically balance themselves out per an accounting standpoint.

     

    Side Note: Regarding MTGE, I projected an exact quarterly dividend of $0.70 per share and MTGE reported a $0.70 per share dividend. I also anticipated a quarterly share buyback of 3 million shares for MTGE and they bought back 3.2 million shares. As such, all the figures were in line and correctly projected.

     

    In my comment above, I also state what AGNC has provided to the public (via SEC disclosures) regarding BV and their dividend payouts. Here's the direct quote:

     

    “…Our principal objective is to preserve our net asset value (also referred to as ‘net book value’, ‘NAV’ and ‘stockholders' equity’) while generating attractive risk-adjusted returns for distribution to our stockholders…”

     

    Within that sentence (and similar statements within the disclosures), I personally feel BV is their first priority. However, management also considers an attractive annual rate of return regarding its dividend as a secondary priority. Other people could interpret that statement as being both figures are equally important. I respect the multiple interpretations.

     

    I actually partially agree with you. I think a $0.15 - $0.20 per share BV increase ($0.10 per share for the additional cut; $0.05 - $0.10 per share for the additional accretion to BV) from the share buyback might not be a proper strategy for the extra $0.10 per share dividend cut. The amount of the dividend declared is solely based on management’s discretion and judgment. I feel this will be one of the first questions asked by shareholders / analysts when management presents at a future conference or when they having their earnings call. The question would be what led to the final decision regarding the quarterly dividend per share amount vs. the amount of quarterly share buybacks?

     

    Other than the BV argument, another potential factor could be an extremely low quarterly estimated REIT taxable income for Q3 2013 (which my first comment above states via the TBA MBS argument; stated in my past dividend range scenario article). Any further increase in the dividend per share amount could have caused their cumulative UTI surplus to drop too low per management's judgment. Therefore, since AGNC had unused capital, they decided to buy back shares that were accretive to BV while keeping their cumulative UTI at a modest surplus. AGNC has always been cautious with their cumulative UTI balance. Again, this is at the discretion of management.

     

    Many other companies are not so cautious. Other sectors and companies (mREITs, REITs, BDCs) seem to have deficits when it comes to their cumulative taxable income balances. AGNC must feel they declared the distributions they needed / wanted to pay out during the quarter while having their cumulative UTI balance be only slightly affected. Again, AGNC is just very cautious regarding this particular figure.

     

    I’m not stating it was the RIGHT call on management’s behalf. However, I try to explain WHY the dividend was less than my personal exact projection amount of $0.90 per share. I think the shareholders have the right to ask the key question I state above. As such, management needs to explain to the shareholders / public their reasoning behind this particular dividend per share decision.

     

    I personally feel they will respond by saying either of the following: 1) preservation of their BV or 2) preservation of their cumulative UTI surplus (or both). Again, the quoted text above supports the first factor. Until the actual financials are released or until management answers this key question, all the public has to go by is evidence and assumptions.

     

    I respect the slight dissent in opinion regarding the BV discussion. This ultimately leads to a better level of overall understanding by the community regarding this particular topic.
    
    Scott
    20 Sep 2013, 07:08 AM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    Phattboy...80c was the steady state level so they were going to get there sooner or later (see my recent article). I think everyone knew that - it was just a question of when.....So they chose to do it in one shot vs drip, drip each quarter and so as not to return capital (vs interest mind you) to shareholders
    20 Sep 2013, 07:35 AM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    scott - if they buyback shares out of UTI vs a div, that would be a taxable event at the REIT level, correct?
    20 Sep 2013, 07:48 AM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Mike...I see Rutgers. Great school. I almost went there. I grew up in Princeton but went to Vanderbilt.

     

    I have a thorough grasp on how buying back shares in accretive to book value. Believe me. My brother and his partner manage two billion. My Dad was a senior managing director at the largest (by assets under management) Venture Capital firm in the country. I came up in the biz

     

    You can pontificate all you want about this stock. Pulling out shreds of "good news" from a horrible situation may be fine with you. I have simply moved on. I don't see the silver lining in yesterday's news. I just do not. They issue 32 million new shares in July 2012, then start buying them back and everyone cheers.

     

    By the way....I enjoy your articles. Good luck.
    20 Sep 2013, 09:47 AM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Mike,

     

    This is all fodder for discussion of course. It is nothing personal. In fact, let's circle back around in December. If I have been misguided on this one, I will certainly celebrate your success.
    20 Sep 2013, 10:14 AM Reply Like
  • ark2
    , contributor
    Comments (71) | Send Message
     
    Scott,

     

    I was very interested to see WMC keep it's dividend flat. I know you don't cover it actively but the portfolio is substantially similar to AGNC. My understanding was they were somewhat less aggressively hedged (although still fairly close to fully hedged) for interest rate moves. It would be interesting to see why they were able to keep the dividend flat - whether it was the lack of buyback or lower TBA position.

     

    Anyway, you have an eager audience should you choose to take a look.

     

    Thanks as always.
    20 Sep 2013, 11:15 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Douglas,

     

    AGNC using cash (unused capital) to repurchase shares has no direct impact on the quarterly estimated REIT taxable income or cumulative UTI dollar amount. You don't reduce UTI by the amount of the buyback. AGNC uses cash (an asset) to repurchase shares (equity). Income / taxable income isn't affected by the buyback. You might already know this, but I wasn't sure from your comment.

     

    What is affected regarding UTI is my calculated "Cumulative UTI Balance vs. Quarterly Distributions Ratio" factor in my dividend articles' tables. Since there are less outstanding common shares after a buyback, with all factors being the same, the ratio automatically increases. Going forward, this a positive indicator regarding the sustainability of the current dividend.

     

    What is taxable is the eventual gain they obtain from repurchasing shares at a discount and re-issuing at a gain / premium. That's a taxable event at the corporate level. On the initial repurchase, they are held in the "Repurchases of Common Stock" account within stockholder's equity (contra equity account).

     

    Regarding tax implications for the current quarter's repurchased shares, the finalized future potential taxable amount would be relatively immaterial regarding expenses in a given quarter.

     

    Very good question to ask.

     

    Scott
    20 Sep 2013, 09:17 PM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi ark2,

     

    Without specifically looking at WMC, I'd said the TBA MBS position.

     

    Ever since Q1 2013, this was the only thing I didn't agree with regarding AGNC's strategy. They realized this in Q2, but by that time the strategy already began to show its potential risks.

     

    I understand why AGNC had this strategy: they didn't feel rates would be spiking due to the implementation of QE3 in late 2013. The dollar roll income provided some additional yield in a low-yield environment. However, as rates began to rise in Q1 and "spiked" in Q2, this particular strategy "back-fired" in my honest opinion regarding valuation losses. In Q2, TBA MBS valuation losses mounted and trumped the quarterly dollar roll income. I know a few readers agreed with this assessment back in Q1 2013.

     

    Again, I can't say what WMC did but I feel the strategy above is why AGNC had the 2 consecutive cuts (among other sector-wide factors). WIth that being said, AGNC's TBA MBS position should be immaterial going forward due to the tax implications implied with these particular instruments.
    20 Sep 2013, 09:26 PM Reply Like
  • 67g8i32
    , contributor
    Comments (231) | Send Message
     
    Orc did not cut div at all. It seems good to me. some people does not like its bimini name though.
    20 Sep 2013, 12:41 AM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    AGNC has screwed its investors in 2013
    2013 investors i.e. me, are locked in for 2-3 years just to break even now!
    First my house, then the DOW, then Silver, then mining shares, now AGNC!
    Statistically, to invest like I have in the last 7 years and be this down is like winning the anti lottery!
    Please short anything I purchase, I am the anti midas!
    Luckily I have no cash left to crash anything else, so you are all safe!
    I am whining, not happy, or wealthy!
    20 Sep 2013, 12:45 AM Reply Like
  • pfifla1
    , contributor
    Comments (509) | Send Message
     
    Sounds like you chase high yields. try to mix some of the risk with some staples. my core holdings have done very well to "cushion" owning both NLY and AGNC. Mining stocks have been horrible.

     

    Just reinvest the DIV - if you had done this with NLY over the past 10 years you would have nearly 800% returns.
    20 Sep 2013, 07:31 AM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    I am at an age, where I am trying to be aggressive!
    But I am just swinging and missing the last few years!
    Lets hope the FED can keep rates low enough, long enough to get that BV back!
    20 Sep 2013, 03:37 PM Reply Like
  • burghdood
    , contributor
    Comments (35) | Send Message
     
    I find it interesting that they are now buying back 11.9kk shares at this time...didn't they, over the last 2-3 yrs., continually sell into the secondary market millions of additional shares? I seemed that these "secondary offerings" helped fund the high (at the time) 20%plus. divs for many quarters. The fact that they are now buying back some of that dilution & still offer 13% is pretty impressive They, in fact, are selling high (remember the "Batesat era"?) & buying low; & maybe we should do the same??
    Does anyone remember the magnitude of the secondary offerings? It may have been on the order of 100kk shares a couple of times, & one wonders how they calibrate the ideal # of shares to buyback?!
    20 Sep 2013, 12:48 AM Reply Like
  • Grafter
    , contributor
    Comments (8) | Send Message
     
    Burghdood

     

    I am guessing here but looks like they have sold 82M shares in the past year and a half. one offering in Febuary 2013 at 31.6 per share 50M shares when the NAV was between 31.64 and 28.93, and one offering in Jully 2012 for 34.06 per share 32M share when the NAV was at 29.41.

     

    They are now buying back at 22.16 with a NAV around 25. I view this as a very good thing selling shares when they are overpriced and buying then back when they are underpriced.

     

    Jonathan
    20 Sep 2013, 07:56 AM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    Invested, a little last year, most early this year!

     

    Its going to take 2+ years to get my money back/break even, assuming the share price does not fall, if the dividend stays at this new rate!

     

    The concern is will AGNC go out of business before I can get my money back? Is 13% worth this risk?

     

    Amazing that the FED just talking about taper and affecting rates, did all of this!

     

    Now, if the FED has lost control of rates, what happens to AGNC, probably not good!

     

    The only hope, is AGNC knows what they are doing ( even though this last year indicates otherwise ) and reinvesting dividends means I get more shares, that stabilize and start rising at the end of next year! Which means new investors have a reason to buy!

     

    Hopefully, there is a shorting frenzy tomorrow, which hopefully destroys the share price temporarily during the dividend reinvestment time frame!
    20 Sep 2013, 01:36 AM Reply Like
  • pfifla1
    , contributor
    Comments (509) | Send Message
     
    Well that is one thing we can predict.... AGNC (based on previous posts by Scott Kennedy) hedges against any major disruptions - fact is in previous quarters the hedges fell outside the range. Now if something apocalyptic were to happen they would help cushion the pain.
    20 Sep 2013, 07:35 AM Reply Like
  • Douglas E. Johnston
    , contributor
    Comments (1743) | Send Message
     
    so you bot a leveraged fixed income bond when 10 year treasury yields were at the historical and I mean historical low 1.5%....i don't think you should be blaming AGNC...
    20 Sep 2013, 07:43 AM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    Yep, I am blaming myself!
    Just my timing in the last few years on asset classes has just been amateur!
    20 Sep 2013, 03:36 PM Reply Like
  • Phattboy43
    , contributor
    Comments (125) | Send Message
     
    Thanks for your response Scott.
    20 Sep 2013, 07:45 AM Reply Like
  • Scott Kennedy
    , contributor
    Comments (3594) | Send Message
     
    Hi Phattboy43,

     

    Thanks for the cordial response.
    20 Sep 2013, 09:33 PM Reply Like
  • Jonathan Christopher
    , contributor
    Comments (285) | Send Message
     
    The REIT story is made up of three parts:
    1. The Federal Reserve is attempting to keep interest rates low, and for the past several years short-term Treasuries have been paying negative real rates. By borrowing short (Short Term Treasury Bonds) and borrowing Long (Mortgage Securities), the Fed has actually been making short-term realized gains in their portfolio..
    2. With the FED keeping short-term rates very low, the REITS have been able to do the same thing, resulting in very profitable spreads.
    3. Both the FED and the REITS will have a day of reckoning, if the spread decreases, or if long term rates rise. While Warren Buffet is correct in that the FED is under no present pressure to reduce (Taper) their purchase of mortgages, that will eventually change.

     

    As long as there is sufficient interest in buying the short Term Treasuries, at low rates, the FED can continue on this track. However there are rising costs looming -ObamaCare,, Increasing Social Security costs due to retirements, Massive and increasing Treasury refundings due to the short-term nature of most Treasuries. Any crisis of confidence in the continuing value of Treasuries and the US Dollar can cause this situation to turn on the dime, with Treasury re-funding costs rising to high levels(Remember 18% Treasuries in the early 1980's?).

     

    I cannot predict the future. This situation may continue for years or it may collapse tomorrow. HOWEVER: The management of AGNC appears to be doing the right thing, as they ride the Tiger.

     

    Disclosure:Hold 5,000 shares AGNC LONG.
    20 Sep 2013, 11:17 AM Reply Like
  • caribsurfking
    , contributor
    Comments (43) | Send Message
     
    Good macro explanation!
    Obviously if rates ever hit 1980's numbers, you would not need REIT's!
    We will get to those rates again, however its a long way off, 30 years down, 10-20 years back up probably!
    20 Sep 2013, 03:36 PM Reply Like
DJIA (DIA) S&P 500 (SPY)
ETF Tools
Find the right ETFs for your portfolio:
Seeking Alpha's new ETF Hub
ETF Investment Guide:
Table of Contents | One Page Summary
Read about different ETF Asset Classes:
ETF Selector