Download 20 Dec 15 AGNC stock price appreciation in 2016

American Capital Agency has bright future in 2016
Earnings, profits and Dividend increases should drive the stock price up in 2016.
Previous stock price in $33 range before Feds comment to raise interest rate in May
2013. Now prices look to rebound.
Company likely to reduce the hedge fund and put more money to work.
By mid-summer expect stock prices to appreciate toward $25.
American Capital Agency Corp. (AGNC) is a mortgage REIT that invests primarily in
agency securities for which the principal and interest payments are guaranteed by the
U.S. Government agency, the Government National Mortgage Association, or a U.S.
Government-sponsored enterprise, such as the Federal National Mortgage Association,
and the Federal Home Loan Mortgage Corporation. The company also may invest up
to 10% of our assets in AAA non-agency and commercial mortgage-backed securities.
What I like about AGNC is the company changed to a monthly paying REIT in October,
2014. AGNC was paying as high as $1.50 per quarter dividend back in June of 2009,
but the dividend dropped over time to $0.65 a quarter before the company started
paying monthly. The dividend started paying $0.22 per month, but reduced it to $0.20
per month, or $2.40 per year.
Back in March, 2013 the stock price closed at $33.20 on March 14, 2013, just prior the
ex-date on Monday, March 18. In May the Federal Reserve Board announced their
intent to raise the interest rate and that send shockwaves through the markets. On
June 25, 2013, the day prior the next ex-distribution date of June 26, the stock closed at
$23.21. This $7 drop (over 20%) was attributed to the Federal Reserve statement. This
effect was seen in all REITs and other lending agencies to include banks. Overall it was
a 30% drop in stock prices.
The second effect was REITs and banks were compelled by investors and analysts in
the market to build huge hedge funds to protect the funds, in case the Feds did raise the
rate and prevent against huge losses. The effect over time was this prevented the
REITs from investing billions of dollars that were tied up in these hedge funds from
earning money and created losses each quarter that investors endured to offset the fear
of the loss when interest rates were raised.
On December 16, 2015, the Federal Reserve Board did increase the rate by ¼ of 1%.
The markets were so stifled that investors and the markets themselves applauded the
raise and are now ready to get on with the higher rate (although it is very small) it will
allow REITs to get back to business. This first rate hike is considered by many as a
one-and-done, for the near-term, as the world and U.S. economies have to improve
more before another rate hike is likely.
What did we learn from this 19 month experiment from the Federal Reserve Board –
Threaten anything long enough and we shall not fear it, but welcome it!
More importantly, what did the REITs, investment companies and banks learn from
this? I think what we are seeing now is many of these companies are losing their fear of
the rate hike and getting back to investing, reducing these huge hedge funds. Over the
next 6 months we are likely to see more capital invested with a better earnings rate.
This will lead to better profits and the first increase to the dividend payout to investors.
Next quarter’s financial reports (usually in April-May of 2016) should produce higher
earnings from investments. By this time the price of the stock will already have
climbed10% over the same period a quarter prior. If we anticipate the next dividend
ending this December, with a stock price near $18.00 and 10% growth the stock is likely
to climb near $19.10 in April, 2016. That is not including the dividend they will pay each
month. By summer, we expect the dividend to begin climbing from the $0.20 per month
to near $0.30 per month. Although ten cents doe not sound like much, that is a 50%
increase in the dividend and a rally to higher stock prices.
To justify the increase in earnings I go back to the last financial report from October 26,
2016.
http://ir.agnc.com/phoenix.zhtml?c=219916&p=irol-newsArticle&ID=2102296
The company lost (-$0.43) per share overall, with (-$1.84) from operations and a
positive $1.41 income from other income. Although the loss, the company continued to
pay its dividend, as it used available cash.
The company has $60.2 billion invested of fixed-rate securities, most tied to 15, 20 and
30 year securities. The company reported its leverage rate of 6.2x, as unchanged from
its prior quarter. As of September 30, 2015, the Company's investment portfolio totaled
$62.2 billion and was entirely comprised of agency MBS and TBA securities.
As far as its hedging activity, the company reported as of September 30, 2015, 96% of
the Company's outstanding balance of repurchase agreements, FHLB advances, other
debt and net TBA position was hedged through interest rate swaps, swaptions and net
U.S. Treasury positions, an increase from 84% as of June 30, 2015. The Company's
interest rate swap position as of September 30, 2015 totaled $45.2 billion in notional
amount, compared to $44.9 billion as of June 30, 2015.
For the third quarter, the Company recorded a net loss of $(817) million or $(2.35) per
common share, compared to a net gain of $215 million, or $0.61 per common share for
the prior quarter. Other gain (loss), net for the third quarter was comprised of:
$(39) million of net realized losses on sales of agency securities;
$(859) million of net losses on interest rate swaps (excludes $24 million of net
unrealized gains recognized in OCI);
$(107) million of interest rate swap periodic interest costs;
$(25) million of net losses on interest rate swaptions;
$(19) million of net losses on U.S. Treasury positions;
$73 million of TBA dollar roll income;
$140 million of net mark-to-market gains on TBA mortgage positions; and
$19 million of net gains on other derivative instruments and securities.
The company, as well as investors and the markets have been expecting this increase
since early summer and the company’s hedge fund was losing money due to the oversized hedge fund. With this first increase, the scare is over and the markets, and AGNC
should take a better position to earn higher income. Based on these numbers investors,
the markets and the company can see this method did not work well. With a reduction
of the hedge funds, the company will become less stagnate in its investments, and
increase earnings.
Based on the numbers above from the company, as of 30 September, 2015, it has
$62.2 billion invested in interest earning investments and $45.2 billion in the hedge
fund. I would look for an adjustments of near $70 billion in investments and $37 billion
remaining in the hedge fund at the end of March, 2016, with the first quarter’s financial
report. By freeing up about $7 billion, the opportunity for increased earnings will spur
the dividend growth and stock price appreciation.
The choice of not readjusting the balance between their investments and their hedge
fund would cost the company billions in earnings in 2016. Without the likelihood of a
rate increase early in 2016 the opportunity to grow cannot be overlooked.
By July-August 2016, when the following quarterly report is released, the earnings,
profits and dividend will increase and may have passed the opportunity ride the stock
price appreciation up near the $25 mark. Our estimated increase of $7.50 per share
(which is over a 40% increase) is very realistic compared to where the stock price was
prior the Federal Reserve threatening the rate hike at over $30 per share. The future is
getting more positive for REITs and American Capital Agency Corp.