American Capital Agency: A Reality Check

| About: AGNC Investment (AGNC)

American Capital Agency (NASDAQ:AGNC) recently paid a substantial dividend (annualized at over 13%) and the stock price fell dramatically.

On the premise that investors try to make rational decisions about their finances, I thought I would take a look at what I believe drove investors to purchase American Capital. Then, I will examine the decline in the stock's price and offer an observation or two on that event.

First, I looked at the usual suspects:

Income: (2010 through 2012) $288 million to $1.2 Billion. Well, that seemed more than encouraging.

Balance Sheet; Specifically, Net Tangible Assets: For the same period, they grew from $1.5 to $10.8 Billion. This also looked good.

Balance Sheet Check for Potentially Soft Assets:(Goodwill, Intangibles) None!

The next logical question seemed to be: How much cash does American Capital have available to continue the funding of dividend payments? Here I group cash and current receivables as being available for this purpose. They have over $14 Billion. Now, how much do they pay out on an annual basis? As of 2012, it was $1.4 Billion. What this means is that AGNC has cash on hand to pay dividends at the 2012 rate (40% higher than today's rate) for 9 years. Put in other terms, they have $9.00 in cash or receivables for each $1.00 in Dividend obligations.

Now, to the present. American Capital is reported to have repurchased 14.8 million of its shares in the open market since 2012. Using the current Dividend Rate of $0.80 per share, American Capital Agency just reduced its required cash outlay by over $11 Million per year!

Finally, I can find nothing that has materially impacted on American Capital's financial well being during 2013. This doesn't mean that there is not something out there, only that I didn't see it. And, to be fair, there has been some talk that the book value may be reduced by 3% percent or more, but this projection was carefully explained as being an estimation made without actual American Capital Agency financial data to support it. This forecast was supported by the observation that the dividend cut decision was justified; however, even if correct, at the 3% level, book would be diminished by only about seventy-five cents, which in this writer's opinion is negligible given the overall strength of the financial picture.

My conclusion is that American Capital Agency is a very financially sound company that has just materially strengthened its balance sheet by implementing a cut in its per share dividend obligations and coupled that action with a reduction of shares outstanding.

In the end, we have an exceptionally strong company with its stock selling at substantially below book value, a proven growth trend in both income and assets and current actions that materially strengthen an already strong balance sheet. So, what's not to love about American Capital? Nothing that I can see; but, why the decline in its stock price?

Examining the decline in the stock price, $.80 was the result of the price being automatically adjusted for the dividend payout. The remaining drop simply the result of there being more sellers than buyers. This, I must attribute to the fear factor associated with the dividend cut. On the positive side, the dividend cut had the effect of strengthening the balance sheet. On the negative side, however, the psychological impact of the dividend cut brought out the sellers. Face it, if you just had an $0.80 dividend in your pocket and a gain in the stock and there was a dividend cut, what would you be likely to do? This is this logic that I believe generated more sellers than buyers.

Now, after letting the sellers clear out of the market place, American Capital's stock price trend is upward, even in a down market. I believe that the more rational investor will see the real value of the stock and the upward trend will continue. The fly in this ointment, however, is the acts or omissions of the President and the Congress. For financial markets, a high tide floats all boats and vice versa. With the current political stalemate, the tide might go way out; I certainly hope not.

Disclosure: I am long AGNC. 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.

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