AGNC earnings power

American Capital Agency Corp. (AGNC) has a massive dividend of near
20%. That easily meets my first criteria for a high dividend stock
which is a dividend yield greater than 6%.

But what about its earning power? I like at least five years of
annual earnings to examine, but ten years is even better. A longer
record of earnings will usually encompass at least one Keynesian
central bank induced boom-bust cycle (e.g. 2001 – present). It is
important to know how the business performed at the top of the boom
and the bottom of the bust in order to determine the average earning
power.

AGNC earnings power

Year, Earnings
2005, not in business
2006, not in business
2007, not in business
2008, $2.36, MAY to DEC ($3.15 annualized)
2009, $6.78
2010 (my est.), $6.28 – $7.18*

Low average = $5.40 EPS/year [($3.15+$6.78+$6.28)/3]
High average = $5.70 EPS/year [($3.15+$6.78+$7.18)/3]

AGNC has been paying a $1.40 quarterly dividend for the last 5
quarters. That equates to a $5.60 annual dividend payment per share
if the company does not change the dividend. It is just too soon to
tell if the average earnings power of AGNC can sustain that $1.40
quarterly dividend. The company’s interest rate spreads tightened in
the last quarter. The company’s net income will decline if the
interest rates spread tightens and that will lower earnings per share.

I would personally stay away from any bank, financial, insurance, or
REIT unless you can understand how the company makes money. I’m still
confused by much of what I read in AGNC’s annual and quarterly
reports. I’m staying away from AGNC despite its huge dividend. I
don’t think the dividend is very safe.

AGNC closed today at $29.47.

*2010 earnings by quarter
2010 Q1, $2.13
2010 Q2, $1.23
2010 Q3, $1.69
2010 Q4, $?.?? (low $1.23 – high $2.13)

Be seeing you!

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Published in: on December 3, 2010 at 11:06 pm  Leave a Comment  

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