American Capital Agency (AGNC) reports 1Q2011 earnings; dividend still not safe.

American Capital Agency Corp. (AGNC) dividend is not safe.  It has a current dividend payout ratio of 107.6%.  Any payout ratio above 100% is a warning to the dividend investor to expect a cut in the future.  The company earned $1.30 per share for its reoccurring business operations of borrowing short (repurchase agreements) and lending long (agency securities).  But that wasn’t enough to cover the $1.40 quarterly dividend per share.

The company earned another $0.18 per share from the net realized gains on sales of agency securities, derivatives, and trading securities.  You can’t count on reoccurring income from these sales and hedges.

The company reported an improvement to its book value from $24.24 to $25.96.  Remember this – AGNC’s liabilities are real, but its asset values must be questioned.  The housing market is not done being clobbered and the government guarantees on agency securities are empty promises.  I place little faith in the book values of financial companies.  Think Lehman Brothers and their nice book value prior to their implosion.

The company remains highly leveraged 7.4 times.  I don’t like this.  It is a house of cards with an attractive dividend yield.  Net interest rate spreads remain the same as last quarter.  This will not change until interest rates rise.  Interest rates will rise.  It is only a matter of time before this house of financial cards comes crashing down.  Austrian economists predicted the the 2007-2008 crash back in 2005.  They are predicting another crash in the next few years depending on the actions of the Federal Reserve and the commercial bankers.

In summary:

·         Dividend – AGNC has a spectacular 19% dividend yield based on shaky leverage and an inflationary Federal Reserve.  A cut is coming in the next year.

·         Earning power – Its dividend is not supported by its reoccurring operations.  Its three year average earnings per share of $1.18 would only be slightly improved by a continuation of this quarter’s performance for the rest of 2011.  Only new capital issues and the occasional sale of some agency securities at a gain are keeping it afloat.

·         Balance sheet – Its balance sheet is horrible because its like a banks: borrowed short and lent long.  The moment that its 25 unnamed credit suppliers cease to rollover its short term debts the whole house of cards will come crumbling down.

You can view the earnings press release here: http://prn.to/AGNC1Q

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BETHESDA, Md., April 25, 2011 /PRNewswire/ — American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

Here is the press release in its entirety:

BETHESDA, Md., April 25, 2011 /PRNewswire/ — American Capital Agency Corp. (“AGNC” or the “Company”) (Nasdaq: AGNC) today reported net income for the first quarter of 2011 of $133.5 million, or $1.48 per share, and book value of $25.96 per share.

FIRST QUARTER 2011 FINANCIAL HIGHLIGHTS

·         $1.48 per share of net income

o    $1.30 per share, excluding $0.18 per share of other investment related income

·         $1.68 per share of taxable income(1)

·         $1.40 per share first quarter dividend

·         $0.42 per share of undistributed taxable income as of March 31, 2011

o    Undistributed taxable income increased $16 million to $55 million

·         $25.96 book value per share as of March 31, 2011

o    Increased $1.72, or 7%, from $24.24 per share as of December 31, 2010

·         22% annualized return on average stockholders’ equity (“ROE”) for the quarter(2)

OTHER FIRST QUARTER HIGHLIGHTS

·         $28 billion investment portfolio value as of March 31, 2011

·         13% constant prepayment rate (“CPR”) for the first quarter of 2011(3)

o    11% CPR for the month of April 2011(4)

·         7.6x leverage as of March 31, 2011(5)

o    7.4x average leverage for the quarter

·         2.58% annualized net interest rate spread for the quarter

o    2.42% net interest spread as of March 31, 2011

·         $1.75 billion of net proceeds raised from equity offered during quarter

o    $1.61 billion raised in two follow-on offerings

o    $141 million raised pursuant to a Controlled Equity Offering(SM) Sales Agreement and via direct share purchase plan share issuances

o    All equity raised was accretive to book value

“Our American Capital Agency team delivered another strong quarter with our strategy of actively managing the portfolio,” said John Erickson, AGNC Executive Vice President and Chief Financial Officer. “This strong performance occurred in a quarter marked by significant global economic and political events, which required the periodic reconsideration of investment strategies. Even in this challenging environment, we grew our book value by 7% to $25.96 per share and earned $1.48 per share of net income while taking steps to reduce risk. In addition, we have added to our AGNC investment staff to broaden our expertise, improve our depth and address the Company’s significant growth.”

“We continue to believe the combination of strong asset quality and diversification, coupled with a thoughtful hedging strategy, which includes some optional protection, remains critical to our ability to achieve our dual mandates of generating attractive returns for our shareholders and protecting book value within reasonable bands,” said Gary Kain, President and Chief Investment Officer of AGNC. “During the first quarter of 2011, the Company raised over $1.7 billion in new equity and continued to produce solid returns across a wide range of different measures.  Book value, undistributed taxable earnings and what many analysts call ‘core earnings’ were all higher during the quarter, despite lower leverage resulting from the typical time lags associated with deploying new capital.”

INVESTMENT PORTFOLIO

As of March 31, 2011, the Company’s investment portfolio totaled $28.2 billion of agency securities, at fair value, comprised of $22.9 billion of fixed-rate agency securities, $4.9 billion of adjustable-rate agency securities (“ARMs”) and $0.4 billion of collateralized mortgage obligations (“CMOs”) backed by fixed and adjustable-rate agency securities(6).  As of March 31, 2011, AGNC’s investment portfolio was comprised of 44% </= 15-year fixed-rate securities, 5% 20-year fixed-rate securities, 32% 30-year fixed-rate securities(7), 18% adjustable-rate securities and 1% CMOs backed by fixed and adjustable-rate agency securities.  

ASSET YIELDS, COST OF FUNDS AND NET INTEREST RATE SPREAD

During the quarter, the annualized weighted average yield on the Company’s average earning assets was 3.39% and its annualized average cost of funds was 0.81%, which resulted in a net interest rate spread of 2.58%, unchanged from the fourth quarter of 2010.  As of March 31, 2011, the weighted average yield on the Company’s earning assets was 3.47% and its weighted average cost of funds was 1.05%(8).  This resulted in a net interest rate spread of 2.42% as of March 31, 2011, an increase of 14 bps from the weighted average net interest rate spread as of December 31, 2010 of 2.28%(9).  

The weighted average cost basis of the investment portfolio was 104.4% (or 104.0% excluding interest-only strips) as of March 31, 2011. The amortization of premiums (net of any accretion of discounts) on the investment portfolio for the quarter was $48.0 million, or $0.53 per share.  The unamortized net premium as of March 31, 2011 was $1.2 billion.

The Company’s asset yield benefitted from purchases of higher yielding securities late in the fourth quarter of 2010 and during the quarter as the Company invested capital from its recent capital raises subsequent to recent increases in interest rates and from a decline in the projected CPR for the remaining life of the Company’s investments. Premiums and discounts associated with purchases of agency securities are amortized or accreted into interest income over the estimated life of such securities, using the effective yield method. Given the relatively high cost basis of the Company’s mortgage assets, slower prepayment projections can have a meaningful positive impact on asset yields.  The projected CPR for the remaining life of the Company’s investments as of March 31, 2011 was 10%; a decrease from 12% as of December 31, 2010.  The decrease in the projected CPR is largely due to purchases of lower coupon securities during the quarter coupled with increases in both spot and forward interest rates. The actual CPR for the Company’s portfolio held in the first quarter of 2011 was 13%, a decrease from 18% during the fourth quarter of 2010.  The most recent CPR for the Company’s portfolio for the month of April 2011 was 11%.

The Company’s average cost of funds declined 9 basis points from 0.90% for the fourth quarter of 2010 to 0.81% for the first quarter of 2011, due largely to timing differences between asset settlements and the initiation of new interest rate swap contracts. These differences led to lower effective swap costs during the quarter than is expected to occur in future periods. The cost of funds as of March 31, 2011 includes both current and forward starting swaps balances, net of expirations, within three months of quarter end.

LEVERAGE AND HEDGING ACTIVITIES

As of March 31, 2011, the Company’s $28.2 billion investment portfolio was financed with $22.0 billion of repurchase agreements, $0.1 billion of other debt(10) and $3.3 billion of equity capital, resulting in a leverage ratio of 6.6x.  When adjusted for the net payable for agency securities not yet settled, the leverage ratio was 7.6x as of March 31, 2011.  The average leverage for the quarter was 7.4x as the Company deployed capital from its recent equity raises.

Of the $22.0 billion borrowed under repurchase agreements as of March 31, 2011, $5.7 billion had original maturities of 30 days or less, $8.7 billion had original maturities greater than 30 days and less than or equal to 60 days, $5.8 billion had original maturities greater than 60 days and less than or equal to 90 days and the remaining $1.8 billion had original maturities of 91 days or more. As of March 31, 2011, the Company had repurchase agreements with 25 financial institutions.    

The Company’s interest rate swap positions as of March 31, 2011 totaled $15.1 billion in notional amount at an average fixed pay rate of 1.79%, a weighted average receive rate of 0.25% and a weighted average maturity of 3.6 years.  During the quarter, the Company increased its swap position, including forward starting swaps ranging up to twelve months, by $8.5 billion in conjunction with an increase in the portfolio size.  The new swap agreements entered into during the quarter have an average term of approximately 4.2 years and a weighted average fixed pay rate of 1.93%. The Company intends the use of swaps with longer maturities to protect its book value and longer term earnings potential.

The Company also utilizes swaptions to mitigate the Company’s exposure to larger changes in interest rates.  During the quarter, the Company added $1.6 billion of payer swaptions at a cost of $17.2 million and $0.3 billion of receiver swaptions at a cost of $0.4 million. During the quarter, $0.3 billion of payer swaptions from a previous quarter expired or were sold.  As of March 31, 2011, the Company had $2.1 billion in payer swaptions outstanding at a market value of $21.3 million.

As of March 31, 2011, 68% of the Company’s repurchase agreement balance and other debt were hedged through interest rate swap agreements. If net unsettled purchases and sales of securities are incorporated, this percentage declines to 60%.  These percentages do not reflect the swaps underlying the payer swaptions noted above, which have an average maturity of 6.1 years.

OTHER INCOME, NET

During the quarter, the Company produced $15.8 million in other income, net, or $0.18 per share.  Other income is comprised of $4.2 million of net realized gains on sales of agency securities, $31.0 million of net realized gains on derivative and trading securities and $19.4 million of net unrealized losses, including reversals of prior period unrealized gains and losses realized during the current quarter, on derivative and trading securities that are marked-to-market in current income.  

The net gains and losses (realized and unrealized) on derivative and trading securities generally represent instruments that are used to supplement the Company’s interest rate swaps (such as swaptions and short or long positions in “to-be-announced” mortgage securities (TBA’s), Markit IOS total return swaps(11) and  treasury securities). Under accounting rules, these positions are not in hedge relationships and consequently are accounted for through current income instead of shareholders’ equity.  The Company uses these supplemental hedges to reduce its exposure to interest rates.

TAXABLE INCOME

Taxable income for the first quarter of 2011 was $1.68 per share, or $0.20 higher than GAAP net income per share for the quarter. The primary difference between tax and GAAP net income is unrealized gains and losses associated with derivatives marked-to-market in current income for GAAP purposes but excluded from taxable income until realized or settled. Taxable income for the first quarter of 2011 benefited from the settlement of gains derived from short TBA positions and payer swaptions entered into during the fourth quarter of 2010. As of March 31, 2011, net unrealized gains that have been recognized for GAAP, but excluded from taxable income, totaled $10 million. Assuming no change in market prices as of March 31, 2011, the Company anticipates recognizing most of these net gains as taxable income during the second quarter of 2011.

NET ASSET VALUE

As of March 31, 2011, the Company’s net asset value per share was $25.96, or $1.72 higher than the December 31, 2010 net asset value per share of $24.24.  

FIRST QUARTER 2011 DIVIDEND DECLARATION

On March 7, 2011, the Board of Directors of the Company declared a first quarter 2011 dividend of $1.40 per share payable on April 27, 2011, to stockholders of record as of March 23, 2011. Since its May 2008 initial public offering, the Company has paid or declared a total of $499.2 million in dividends, or $14.66 per share.  After adjusting for the first quarter 2011 accrued dividend, the Company had approximately $55 million of undistributed taxable income as of March 31, 2011, an increase of $16 million from December 31, 2010. Undistributed taxable income per share as of March 31, 2011 was $0.42 per share.  

(1) Based on the weighted average shares outstanding for the quarter.  Please refer to the section on the use of Non-GAAP financial

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Published in: on April 26, 2011 at 12:32 pm  Leave a Comment  

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