If I tell you that you could invest in a stock paying 19.38% in dividend yield, would you do it? RED FLAG
If I tell you this stock cut its dividend back in February 2012 and never increased it afterwards, would you invest? RED FLAG
If I tell you this company invests in Agency Securities, would you invest? Do you even know what agency securities are? RED FLAG
I have been asked by several readers in May to do some research and write about American Capital Agency Corp. Without looking at the company too much, I ran my numbers analysis to see what the company looks like. Here’s my stock analysis chart:
Ticker AGNC US Equity
Name American Capital Agency Corp
Dividend Metrics Current Dividend Yield 19.29
5 year Dividend Growth #VALUE!
1 year Dividend Growth -8.26
Company Metrics Sales Growth (1 year) 71.95
Sales Growth (5 year) #VALUE!
EPS growth (5 year) #VALUE!
P/E ratio 10.89
P/E Next Year 6.42
Margins growth #VALUE!
Payout ratio 119.81
Return on Equity 8.46
Debt to Capital Ratio 7.75
My first thought was: Man! The numbers are odd! No 5 year data (dividend, sales, EPS)… this means this stock wasn’t on the market for the past five years. Then, dividend growth is negative over a year. To be honest, I would have sold the stock right away without counting. But let’s continue to see what is interesting (or not) with a 19% dividend yield stock (you already know what I think of high yield dividend stocks though…).
The Price to Earnings Ratio is very low while the payout ratio is through the roof…. And the debt to capital ratio is ridiculously high…. Oh wait! This is not a stock, it’s a REIT!
This explains why the P/E ratio is low (as REITs are not as valued as stocks because of their limited growth potential). This also explains why the payout ratio is through the roof and the company is using so much leverage. American Capital Agency Corp (AGNC) is an “original” REIT per se. Instead of classically invest in commercial strips, rental properties, offices, etc like normal REITs do, AGNC invests in Agency Securities only.
What are Agency Securities?
Agency securities are securities issued by the US government agencies or its credit farm (Fannie Mae and Freddy Mac). In other words, AGNC is investing in mortgage backed asset securities (RED FLAG!!!).
I guess the positive side of this story is that mortgages are backed by USA agencies. So technically, the default risk is pretty minimal. However, the negative side of this story is the constant pressure the FED is applying on the interest rate since 2009.
We are pretty far from an interest rate rally if you want my opinion and the previous QE3 severely hit AGNC’s balance sheet. Since interest rates are at a bottom, chances are that AGNC may cut their dividend again by the end of 2013. This would be another dark red flag right there. In fact, at this point, the flag is not red anymore; we are now seeing a black Pirate flag! Hahaha!
The Math Behind This Company is Darn Complicated
I wanted to learn more about this company and how it makes money. This is when I started my research on the web, reading their financial statements (this is where I found that management who cut their dividend a year ago claims it is “strong and consistent”…ahem!), and going forward on other websites to see what has been written about it.
I found a very interesting article over at Seeking Alpha. The author wrote a simple update on the company after its Q1 update this year. The “simple” update is over 7,000 words long. It is filled with excel charts, calculations and explanations on them. While I salute the work that has been done there (I definitely don’t have the kind of skill and patience to write such an article), I was reading this piece and thinking the whole time “the stock market is filled with great buying opportunities that are so easy to understand, why bother investing in this this complicated business model??”. I guess the answer to my question is “19% of dividend yield!”. In my opinion, this should never be a good answer.
I Would Not Invest in AGNC
The stock doesn’t show growth for the past 5 years, in fact it wasn’t there 5 years ago.
The stock cut its dividend in 2012 and still shows possibilities of cutting its dividend again this year.
In a record low interest environment, doesn’t a 19% yield seem a bit fishy?
I can’t get my head around the complicated calculations to know if the company is able to sustain its dividend or not.
I don’t like mortgage back securities due to what happened back in 2008. I can’t trust something that was born from a bubble.
Well… I think it’s enough for today, isn’t it? Are there any AGNC supporters? I’d like to hear your point of view on this stock. Who’s in?