AGNC Investment reports an increase in its book value. Can a dividend increase happen?


TThe past year has been difficult for the financial sector as banks and real estate investment trusts (REITs) have underperformed due to efforts to tackle the coronavirus outbreak. The mortgage REIT industry has been hit particularly hard, and many companies operating in this industry have had very difficult headwinds to overcome. As the markets calmed down over the summer, these mortgage REITs finally recovered some (or all) of their previous valuations.

For AGNC investment (NASDAQ: AGNC), the reversal in book value is almost complete. Is it time for the company to reassess the current (reduced) dividend payout rate?

Mortgage REITs are a little different from typical REITs

Mortgage REITs are a slightly different animal than the typical REIT. Most REITs follow a landlord-tenant model, in which the company develops real estate assets and then leases them. A typical example might be Real estate income (NYSE: O), which rents free-standing properties to tenants like pharmacies, convenience stores or dollar stores.

Image source: Getty Images.

Mortgage REITs do not invest in physical real estate assets; they invest in real estate debt. For a mortgage REIT like AGNC Investment, this debt typically means mortgage backed securities, which are backed by government guaranteed mortgages. For example, if you recently refinanced your mortgage, it may end up on a mortgage REIT’s balance sheet.

AGNC has published strong quarterly results

AGNC reported fourth quarter earnings per share of $ 1.16 as the mortgage-backed securities market remained strong. During the fourth quarter, financial markets were generally favorable and credit spreads improved. Surprisingly, mortgage-backed securities spreads outperformed government bonds. Finally, we saw a robust real estate market, with median home prices increasing by double-digit percentages. All of these factors contributed to AGNC’s results.

Recovery is almost complete

At the onset of the COVID-19 crisis, financial markets suffered a liquidity crisis and many mortgage REITs were forced to sell assets and cut dividends. AGNC Investment was no exception, reducing its monthly dividend from $ 0.16 per share to $ 0.12, as the book value per share fell from $ 17.66 at the end of 2019 to $ 13.62 at the end of March 2020. AGNC reported that the book value per share had returned to $ 16.71. at the end of 2020, and had increased another 3% after the end of the quarter. This recovery raises questions about the return of the dividend to previous levels.

Will we see an increase in dividends?

On Monday’s fourth quarter earnings conference call, CEO Gary Kain said about the dividend:

If you look at our current dividend versus any other dividend vehicle in this environment or really your alternatives around income, the return of around 9% for AGNC is very, very attractive from an overall perspective. … Look, we’re going to continue to assess the dividend going forward. And that’s an important part of how AGNC takes care of shareholders. But again, this is not the only piece. And that’s the combination of dividend, book value, which then translates into the share price, we’ll continue to be active in repurchasing shares when that makes sense. And we believe that in the long run, this is the best overall equation for shareholders.

During the quarter, AGNC repurchased $ 101 million of common stock at an average price of $ 15.32. At the end of the third quarter, the book value per share was $ 15.88, so the company was repurchasing shares below the book value. It appears that if AGNC trades with a discount large enough to reserve, the company will choose to repurchase shares. If the stock price is approaching the pound, then maybe a dividend hike is in play.

If you look at the chart below, you’ll see that this is the lowest return for the stock, hardly ever. Mortgage REITs like to keep the return within a target range, so it wouldn’t be surprising to see the company increase it, especially as the stock moves closer to its pre-COVID book value with a lower dividend of 25. %.

AGNC Dividend Yield Chart

AGNC Dividend Yield data by YCharts

As Kain pointed out during the conference call, AGNC Investment’s performance is one of the most attractive in the financial markets. Income investors should take the time to understand the mortgage REIT space, as alternatives are scarce.

AGNC has the most powerful investor on the planet (the Federal Reserve) actively working to support its business model. Income investors should take note of the old market saw: “Don’t fight the Fed. AGNC is one of my CAPS choices.

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Brent Nyitray, CFA has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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