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Analyst Blog

American Capital Agency Corp. (AGNC - Analyst Report), a real estate investment trust (REIT), has recently declared a second quarter 2012 dividend of $1.25 per share, which is payable in cash on July 27, 2012 to shareholders of record as on June 21, 2012.

Earlier in first quarter 2012, American Capital Agency had also paid a quarterly dividend of $1.25 per share, which equated to a total of $1.5 billion in dividends or $20.11 per share since its initial public offering in May 2008. Over the years, the company has been paying a steady dividend to its shareholders and even continued to pay it during recession when most companies had suspended the same to avoid liquidity crunch.

A steady dividend payout facilitates the long-term strategy of American Capital Agency to provide attractive risk-adjusted returns to its stockholders. Investors looking for high dividend yields are increasingly favoring REITs. Solid dividend payouts are arguably the biggest enticement for REIT investors as the U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends to shareholders.

American Capital Agency focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs). The company purchases single-family residential pass-through securities which are interests in pooled loans of principal and interest including pre-paid principal that are made to the holders of the notes. Collateralized mortgage obligations consist of multiple classes with payments of principal and interest being made to note holders based on the maturity date of the class of security.

American Capital Agency invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FHLMC) and Ginnie Mae (GNMA). Specifically, American Capital Agency invests in FHLMC Gold certificates, FNMA certificates, and GNMA certificates.

With the government takeover of FNMA and FHLMC, American Capital Agency’s securities have an explicit government guarantee, which makes it a much more attractive prospect for investors. Additionally, the company’s portfolio of government-backed assets is relatively liquid and credit risk is limited.

American Capital Agency borrows against its investment portfolio pursuant to a master repurchase agreement which provides short-term financing, typically 30-90 days. The company makes a profit and pays dividend from net interest income, which is the difference between interest earned on investments and its cost of borrowing.

American Capital Agency also purchases payer swaptions to protect against lower interest rates that might lead to early prepayment of the mortgages. This measure ultimately facilitates the company to continue making money by collecting premium and ensures a steady revenue stream, which in turn helps to maintain a steady dividend payout.

We maintain our long-term Outperform recommendation for American Capital Agency, which presently has a Zacks #1 Rank that translates into a short-term Strong Buy rating. We have a Neutral recommendation and a Zacks #3 Rank (short-term Hold rating) for Anworth Mortgage Asset Corporation (ANH - Snapshot Report), one of the competitors of American Capital Agency.

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