AGNC Investment Corp (NASDAQ:AGNC) has become a top choice for investors searching for high-yielding opportunities in the market. With a yield of over 16%, it’s hard to ignore the potential returns that AGNC offers.
As a company that distributes a large portion of its earnings to shareholders, AGNC’s share price has seen a decline. This is a common trend among high-yielding companies, as they often fund expansion through share dilution and debt accumulation when interest rates are low. While this may result in lower share prices, the high yield offered by AGNC is too attractive to pass up. Additionally, the share price is already trading well below the sector’s average earnings multiple of 9, limiting the potential downside. Overall, I see AGNC as a great opportunity for investors.
AGNC is an internally managed real estate investment trust (REIT) that focuses on agency-backed mortgage securities (agency MBS). Since its establishment in 2008, AGNC has primarily invested in single-family residential mortgages and collateralized mortgage obligations. These investments are primarily financed through collateralized borrowings structured as repurchase agreements (repos).
The company’s main objective is to provide shareholders with a convenient avenue for investing in agency mortgage-backed securities (MBSs), delivering long-term value through a combination of dividend distributions and net asset value appreciation. AGNC operates with a clear and straightforward business model, generating income from its investment portfolio to offer a consistent income source to its shareholders.
During AGNC’s last earnings call held on July 25, CEO Peter J. Federico shared insightful perspectives on the company’s recent performance and the market’s direction:
“At current valuation levels, Agency MBS looks extremely attractive on a standalone basis and provides investors a compelling alternative to U.S. Treasuries. New production Agency MBS, with a spread to the 10-year Treasury of about 175 basis points, offer investors the ability to earn a 5.5% yield on a security backed by the explicit support of the U.S. government. This combination of yield and credit quality makes Agency MBS appealing to a wide range of investors.”
The positive market sentiment towards government-backed securities reinforces my confidence in AGNC’s ability to grow its asset base. As the asset base becomes more valuable, it can lead to higher capital returns and provide greater opportunities for maintaining and increasing dividends. Additionally, as interest rates decrease, the real estate market is likely to gain momentum and result in increased capital circulation.
Looking At The Dividend
Although there has been a decrease in AGNC’s dividends recently, the company has successfully maintained them over the past few years. As interest rates decrease, there is a possibility for the cost of funds to decrease as well, potentially leading to a dividend raise. Currently, with a yield of over 16% in the market and strong backing from the US government, AGNC presents an enticing opportunity. Despite the company dedicating a significant amount of capital to dividends rather than expansion expenditures, its price-to-earnings ratio remains incredibly low, exhibiting a 62% discount to the financials sector.
Furthermore, AGNC’s upcoming earnings report holds potential for positive news. While estimates project a slight quarter-over-quarter decline in funds from operations (FFO), I believe AGNC’s history of beating estimates may result in better-than-expected performance. A higher beat could ignite the short-term share price for the company.
The recent increase in Fed fund rates has led to a significant rise in AGNC’s borrowing costs. However, it’s crucial to recognize that higher interest rates could impact the company’s profitability through various avenues. As Treasury rates remain elevated and the possibility of further rate hikes lingers, mortgage rates have reached multi-year highs. This trend can have far-reaching consequences for AGNC’s business model, affecting the demand for refinancing and new mortgages.
Moreover, as the Federal Reserve continues to tighten monetary policy, AGNC’s cost of funds has steadily climbed. With rising interest rates and potentially lower returns on investments, the company and its investors face challenges. It’s important to consider these risks before making investment decisions.
Despite AGNC’s increase in borrowing costs amidst climbing US interest rates, it remains an attractive high-yield stock. With a dividend yield of over 16%, AGNC offers a compelling opportunity for investors. The company’s strong backing and low price-to-earnings ratio indicate limited downside potential. I believe AGNC is heading in the right direction and rate it as a buy.