AGNC reports 2Q2011 financials. Dividend in jeopardy and it is speculatively priced.

American Capital Agency Corp (AGNC) is nearly speculatively priced despite its low advertised PE ratio.  This company remains dangerously leveraged.  Higher interest rates and another credit crisis will destroy its profits.  But the yield remains huge until they cut their dividend.

Headline from a few days ago "American Capital Agency Reports $1.36 Earnings, $26.76 Book Value Per Share, Adds Two Directors"

Let’s take a look at 2nd quarter financials

American Capital Agency Corp (AGNC)

Market price: $27.92

Shares: 178.51 million shares

Market Capitalization: $4.983 billion

Dividend record: 9 quarters of $1.40 dividend payments

Dividend: $1.40/share quarterly

Dividend yield: 20% ($5.60 annual dividend / $27.92 share price)

2nd quarter EPS: $1.36

Dividend payout ratio: 103% ($1.40 dividend / $1.36 EPS)  It gets harder and harder to pay that $1.40 dividend as the company continues new equity offerings to finance its leveraged finance.  AGNC will have to pay $250 million per quarter in dividends going forward (178.51 shares x $1.40 dividend).  They only earned $177.8 million this quarter.  Not good.

Earning power: $1.46 per share @ 178.51 million shares

(earnings adjusted for changes in capitalization.  There were only 15 million shares at the end of 2008.  They issue massive amount of shares to pay for their leverage.  There are over 178 million shares now)

                        EPS       Net inc.             Adj. EPS

2006                 –           –                       –

2007                 –           –                       –

2008                 $2.36    $35.4 M             $0.19   

2009                 $6.78    $118.6 M           $0.66

2010                 $7.89    $288.1 M           $1.61


2011-03            $1.48    $133.5 M           $0.75

2011-06            $1.36    $177.8 M           $0.99

2011-09            ?           ?155.7 M?          ?0.87?

2011-12            ?           ?155.7 M?          ?0.87?

3 year average adjusted earnings (2008-2010) = $0.82 per share

4 year average adjusted earnings (2008-2011E*) = $1.46 per share

* I’m assuming that AGNC will earn the average of the first two quarters of 2011 which was $0.87.  This is conservative.

Based on the four year average:

Consider buying AGNC at or below $17.82 (12 times avg earnings)

Consider selling AGNC at or above $29.20 (20 times avg earnings)

AGNC is trading at 19.1 times average earnings assuming that the second half of 2011 will be the same as the first half.  This is almost speculatively priced.  Don’t be fooled by the low PE ratios you see on Google Finance (3.97), Morningstar (forward PE 5.6), and Yahoo Finance (P/E ttm: 4.27)

Balance sheet: skyrocketing assets and liabilities due to ~8x leverage; equity going up


Book value per share: $26.76 ($4776.646 M equity / 178.51 M shares)

Price to book value ratio: 0.999

Disclosure: I don’t own AGNC and I don’t plan on owning it.

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Published in: on August 1, 2011 at 2:28 am  Leave a Comment  

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