AGNC Investment Corporation (AGNC)
|Shares Outstanding||570 million|
|Market Capitalization||$7.5 billion|
|BMR Target Price||$16|
|BMR Sell Price||$10|
Coverage reinitiated June 18, 2020 at $13.25 in the REIT portfolio
Company Overview. AGNC Investment Corporation is a REIT that invests primarily in Agency residential mortgage-backed securities (RMBS). The principal and interest are guaranteed by the U.S. government or an agency such as Ginnie Mae, Fannie Mae, and Freddie Mac, so they are deemed less risky than non-agency MBS. Generally, lower risk securities also equate to lower returns. However, not in AGNC’s case.
Founded in 2008, the $8 billion market cap company manages a $93 billion asset portfolio with $91 billion in fixed-rate agency RMBS. Management uses short-term financing with leverage of 6 to 10 times, to generate higher returns. Essentially they borrow short and invest longer. Thus the risk. No one is going to give you a 10%+ yield without risk. But they have been doing it for years and have built a company worth
Market Analysis. The Mortgage REIT (MREIT) market has had its share of troubles over the last couple of years. With a trade war and increased tariffs, the Street and others raised the specter of a recession. In 2019, the yield curve flattened and even inverted (short-term U.S. Treasury yields higher than long-term yields), signaling this was a real possibility. Since AGNC borrows money to fund its asset purchases, this was a bad situation for the company.
The yield curve has returned to normal as we write this. At the start of 2020, the 2/10 spread was 30 basis points and it currently stands at 54 basis points even though we are officially in a recession. The yield curve’s slope is positive news. COVID-19 caused market dislocations and the Federal Reserve slashed interest rates and supported Agency MBS and other asset classes with purchases, which also helped AGNC since it kept markets functioning.
As we (hopefully) move past the pandemic, the company could see increased mortgage refinancing since interest rates are so low. This isn’t necessarily good for the company since it receives the repayment and is forced to invest at lower rates. This doesn’t present a big risk for the company right now. Homeowners will simply not rush into new loans given high unemployment and low job security, nor are banks going to extend loans to them until their financial situation improves. We will keep an eye on this for you, of course.
Competitive Analysis. The field is wide open, with dozens of publicly traded MREITs. Only one, Annaly Capital (a buy recommendation), is a large-cap stock at $10 billion. With a portfolio valued at over $90 billion, AGNC sits near the top of mid-cap MREITs. In this weight class, competitors are Blackstone Mortgage Trust, Chimera Investment Corporation, MFA Financial, and New Residential Investment Corp. (another BMR recommendation).
AGNC offers an attractive dividend yield compared to other MREITs, assuming it maintains the current payout. That is not a sure thing. In fact, it cut the dividend in 2019 by 2 cents to $0.16/month and another 4 cents two months ago. Still, at 12 cents/month that equates to $1.44 a year, over 10% at the moment.
For those of you that are more risk-averse, there are four classes of preferred shares that offer greater security (safer dividends, higher priority than the common). The company can cut the common dividend easier than skipping the preferred dividend. (In fact, we believe the preferreds to be cumulative, whereby if they skip a payment it has to be made up in the future.) The tradeoff is that the preferred classes have lower yields and less upside potential.
Financial Analysis. With the pandemic spreading and shutdown orders starting in March, AGNC had a challenging 1Q20. The company’s net interest income fell from 1Q19’s $165 million to $65 million. Book value per share on May 31st was $14.86, about 12% higher than where it is trading now.
Stock Performance. Since the market crashed in late-February, the stock went from $19.65, a 52-week high, down to $6.25, a 52-week low a month later. It is now trading in the middle of that range. Provided the company doesn’t have to cut the dividend further, this is an attractive 10.8% yield, and the stock has a big potential upside.
The preferreds are Class D, C, E and F, with symbols AGNCM, AGNCN, AGNCO, and AGNCP. (Talk about confusing!) We will do a future report on the preferreds. All preferreds have recovered nicely. Most are still trading about 10% below their early-March levels and lower than the $25 par value where they typically should trade.
The Series C preferred stock has a fixed 7.0% dividend rate until October 2022. Trading at $23, the yield is 7.6%. Its payout becomes variable in 2022 when it is a 511-basis point spread over the three-month LIBOR.
Its Series D 6.875% preferred offers a fixed rate until April 2024. Based on the current $22.50 price, the yield is 7.6%. In 2024, the dividend is a 433-basis point spread over LIBOR.
Turning to the Series E 6.5% preferred, closing at $22.40, the yield is 7.3%. After October 2024, the payout is about a 5% spread over LIBOR.
Lastly, the Series F 6.125% preferred, at $21.40, provides a 7.2% yield. In April 2025, the floating rate is a 470-basis point spread over LIBOR.
BMR Take: AGNC Investment is a survivor and a thrivor. (We made up that word.) On a book value basis, you are buying today at a healthy discount. Asset value recoveries will provide you with a strong appreciation potential. We have a $16 Price Target and the stock could easily surpass this if things return to normal fairly quickly. We do want to protect you on the downside, so we have a $10 Sell Price.
Right now, we see mortgage refinancing as the biggest risk, which would hurt the company’s cash flow. For those of you concerned about it, we like the preferred shares. There is some significant upside, and each has over a 7% yield.