Dmitry Zemidovich
AGNC Investment Co., Ltd. (Nasdaq: AGNC), mortgage REITs (real estate investment trusts) have been the subject of much debate in recent months. On the one hand, the company’s 13.5% annual yield and monthly dividend payout are very attractive to most types of investors. I have it in my portfolio. On the other hand, the fact that interest rates are on an upward trend and likely to remain at high levels over the next few years is likely to continue, which could harm the company’s ability to maintain its book value and dividend payments. I have.
The company has successfully hedged against these rate hikes, resulting in a strong performance in the most recent quarter with a payout ratio of just 46%. But it certainly masks the question of dividend sustainability.
So the question in my mind as an AGNC holder is that until the US Federal Reserve starts to cut interest rates and NAVs on mortgage REITs, the company will use short-term hedging and other cash to make it relatively high. Is it possible to maintain dividend payments? start to increase.
Some of the best payouts
AGNC Investments has one of the best payout structures on the stock market today. I’ve owned AGNC Investments for several years now, but have taken a bigger position in the past year or so when the stock price plummeted during and after the COVID-19 pandemic and the annual dividend yield rose to around 15%. I started to
The cherry on the cake is that the company pays this dividend each month. This increases short-term and long-term incentives to hold stock positions.
in the short term, monthly payments allow short-term people to receive a payout of about 1% per month on the cash invested. No, but it’s a good short-term strategy if you can maintain your share of the company with a yield of 13.3% or higher. Monthly dividend after tax.
in the long run, which slightly increases the overall return. Again, this is before the debate about dividend sustainability, but it offers better returns than quarterly or annual yields, assuming it stays within certain bounds. Considering the classic investment scenario that I like to use, if you invest $100 and then invest $50 in AGNC every month over a 25 year investment plan, you can earn about $4,000 more at the end of that period. .
Given these two factors, the company has been perceived as a very attractive investment over the past two years or so, even if the underlying fundamentals are a bit sketchy.
headline fundamentals mask headwind
A lot of people have been flocking to AGNC Investments over the past few quarters and a year, but the company has reported very high and relatively unsustainable payout rates. This meant that they were paying more dividends on stocks than they were getting from interest on mortgage securities.
But then came the most recent quarter when hedging started and earnings increased significantly, with a reported payout rate of around 46%. That happened, and while most dividend rates now show a “46% payout ratio,” the company is projected to lose even more book value and earnings.
After reporting adjusted EPS of $3.03 for the year, the company is expected to report low-double-digit declines over the next two years, with the expected rebound roughly in line with the expected fall in the federal funds rate. I will. next section of the article.
AGNC EPS Forecast (looking for alpha aggregator)
Whether AGNC Investments will be able to sustain its dividend payments remains questionable, as rising interest rates will adversely affect both a mortgage REIT’s NAV and its ability to generate sufficient interest income to pay this dividend.
Risk reward profile is favorable 50-50
The prospects for the company to maintain a high enough dividend to remain attractive to both existing and potential new investors are more or less a coin flip.
pessimistic view This means there is historical precedent for reducing the cash amount of dividends as mREITs’ NAVs have fallen and interest income earnings have struggled. This means that if we report a 25% decline in earnings over the next two years, we will report a 25% reduction in our dividend so that we will be fine in the long run.
This would result in a dividend yield of less than 10%, a higher yield than in the broader market, but potentially making the risks and rewards unattractive to those who do not have a high degree of confidence in the housing and mortgage markets. There is a nature. , will be hit by the recession and housing market correction.
optimism said the company could and should cut its dividend to maintain a healthier balance sheet and value, but could do so without hurting existing or new investors. I’m here. They can continue to use hedging to generate meaningful negative interest expense. This will increase your earnings and allow you to use cash on hand to maintain dividends until earnings and value recover.
focus on the positive
The negatives of this paper are serious, but have been covered extensively by other Seeking Alpha contributors over the past few months, so it’s not boring to discuss them. My favorite and most recent article is by Johnathan Weber titled his AGNC Investment: Be Fearful When Others Are Greedy. I believe it fully and most accurately summarizes the risks and negative sentiment around AGNC’s dividend sustainability.
The upside, however, is that there are two main factors we consider when considering investments for the next 1 or 25 years.
The Fed’s Dot Plot Looks Favorable
High interest rates will adversely affect the NAVs of mortgage REITs, but the current relatively high interest rate environment is not expected to last very long. At the Federal Reserve Board’s latest meeting on December 14, 2022, they presented their latest dot plot.
By 2025, they project average interest rates will drop to about half of what they are today, which should be good for mortgage REITs.
fed dot plot (Summary of economic forecast)
Considering the fact that average interest rates are expected to stay around 5% to 5.5% for some time before being lowered to prevent overheating, inflation is not expected to last very long. This means the company needs to get higher value and interest going into his 2025.
Analysts are also predicting that. After reporting a decline in adjusted earnings per share quarterly, he expects a return to growth in the 2025 quarter.
AGNC EPS Forecast (Looking for Alpha Aggregator)
This leads to point 2.
They can keep paying…
The company pays an annual dividend of $1.44, or about $850 million. That number may skyrocket given the losses they report on a GAAP basis, but they can certainly sustain it for the next two to three years until they return to growth with low interest rates. It trades hundreds of millions of dollars in asset securities as a hedge against upside, and has nearly $1 billion in cash and equivalents to help maintain payments.
This means that their company only needs to be in the red for a year or so of paying dividends, which means there will be no reduction in dividends like they have in the past.
I believe the company can cut the dividend amount by 10%. We believe this will help sustain the business as interest rates start to fall in the next year or so. That way, I believe, investors can maintain their positions without readjusting too much to lower yields.
Investment Conclusion: 50-50 Risk Reward
New investments in AGNC Investment Corp. can be a bit risky now, but existing investments at low prices can be good and sustainable.
I believe it is likely that the company’s asset values will continue to decline, but I would like to reduce the dividend by about 10% to ensure that the remaining dividend can be maintained until earnings and values increase again. As of early 2025, AGNC Investments still presents one of the best dividend strategies in 2023 and beyond.
As for AGNC Investment Corporation, it is likely that there will be some form of continued share price pressure in the coming months, even more likely if it actually cuts its payouts. I believe it will be a good time to add some to the position after all the prices have been set to make better use of the later years.
I’m somewhat bullish on AGNC Investment Corporation heading into 2023 and am buying more shares in the hope that the company’s stock price will fall below $9.00 to $9.50 per share, and my retirement. I intend to hold the account for the expected 25 years.