American Capital Agency Corp. (AGNC) is still a buy and hold for the great dividend it provides and will continue to pay the rest of this year. The current price is over $33.00 a share and even if the stock price drops down to $30.00 per share that would effectively push the yield rate up. Currently the return is over 15% for the annual return. The book price is $28.93, but due to the excellent dividend return, the stock trades at a premium.
At the stockholders meeting on 30 Apr 13, the company reported a quarterly loss of $557 million or $1.57 per share. Investors were disappointed in the report, but digging into the details shows some strengths in the financials that may be overlooked.
Total assets were down from a value of $100 billion in Dec 2012 to $93 billion at the end of the first quarter 2013. But looking deeper the liabilities were down as well from $89 billion in Dec 2012 to $81 billion in Mar 2013. Another positive was the cash-on-hand was up from $2.4 billion in Dec 2012, to $2.8 billion in Mar 13. The company paid its $1.25 dividend per share and still reduced liabilities more than it lost in assets, and the cash-on-hand increased slightly. This demonstrates a commitment from the company that the $1.25 dividend will continue into the future, and the management team is focused in the tight market. Dividends are not draining this cash reserve and this cash reserve may be saved for a time when the interest rates rise and AGNC will be able to take advantage of some very unique opportunities.
Shareholders voted with confidence to authorize an increase in shares of preferred stock from 10,000,000 to 20,000,000 shares. The current preferred stock pays an 8.0% return and for a common stock shareholder, this is a cash explosion as the dividend remains over 15%. The company will have large amounts of cash to invest in new opportunities and over the next 3 years and the government is expected to decrease its purchases of U.S. treasury securities. This will allow interest rates to normalize (increase) which provides an opportunity for an increased spread in interest rates for the marketplace. This translates to a greater ability to make a profit.
Through this first quarter we have seen the economy limp along and the housing industry show some signs of life. We are still waiting for both to show sustained increased gains for multiple quarters. AGNC is sitting on $2.8 billion in cash reserves and with the sale of another 10 million shares of preferred stock the company will have the ability to quickly take advantage of multiple opportunities in the fast-paced markets.
Prior to this quarterly report, AGNC has reported several solid quarterly reports and beat expectations along the way. We see this as a buy-and-hold for the long term. Each of the previous quarters has increased the cash-on-hand above the dividend payouts and although this quarter failed to reach this level the cash flow still increased and is expected to continue to grow. We rate this as a buy through $35.00 per share. Investors buying in for the long term can benefit from the sustained income potential and security in the good business practices by the management and a solid marketplace for the future.
The stock price has increased over 10% in the last year. Investors have seen the strength of the company and return on their investment through the dividends and are bidding up the price. I see this as a market adjustment as the company still returns over 15% in dividends for the year and opportunity for growth.
American Capital Agency Corp. is a real estate investment trust that invests in agency pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: I own stock in AGNC and plan to continue to build my position.