To The Moon

  $AGNC Investment Corp(AGNC)$

As interest rates have started to decline, previously unattractive high-yield investments have gained renewed interest. One sector benefiting from this shift is mortgage REITs (real estate investment trusts), which are now appealing to income-focused investors. Among these, AGNC Investment Corp., a mortgage REIT with a 15% dividend yield paid monthly, has been attracting attention and receiving multiple buy ratings from analysts. AGNC has also become the second-largest mortgage REIT in its sector, trailing only Annaly Capital.

Quarter 3 Earning Overview

Net Spread and Dollar Roll Income Per Share: The key metric for dividend affordability. This has been declining but remains above the dividend payout.

Comprehensive Income Per Share: Reported at $0.63 for the latest quarter, highlighting overall profitability but not the best indicator for dividends.

Total Return: Year-to-date, AGNC has delivered over 15% in total returns, primarily driven by dividend reinvestments.

Earnings Per Share (EPS)

• Definition: EPS measures a company's profitability and is calculated by dividing net income by the total number of outstanding shares. It reflects how much profit is allocated to each share of stock.

• For AGNC: EPS isn't the primary metric for evaluating mREITs because their income often includes unrealized gains/losses due to fluctuations in the value of their MBS portfolio. For AGNC, a more relevant metric is Net Spread and Dollar Roll Income per Share, which reflects the earnings available to cover dividends.

Dividends Per Share (DPS)

• Definition: DPS indicates how much of the company's earnings are distributed to shareholders as dividends. For AGNC, dividends are a major appeal, with a current yield of approximately 15%.

• Current Dividend: AGNC pays $0.12 per month ($0.36 quarterly).

Fundamental Analysis

Business Model

• Core Operations: AGNC is a mortgage REIT (mREIT) that invests primarily in agency mortgage-backed securities (MBS), which are guaranteed by government-sponsored entities (e.g., Fannie Mae, Freddie Mac, Ginnie Mae).

• Revenue Generation: AGNC earns revenue through the interest spread between the yields on its MBS portfolio and the cost of borrowing (leverage).

• Dividend Focus: As an mREIT, AGNC distributes at least 90% of its taxable income to shareholders as dividends to maintain its REIT status.

Key Financial Metrics

• Dividend Yield: ~15%, significantly higher than the average market yield. This makes AGNC attractive to income-focused investors.

• Payout Ratio: ~83.7% of its net spread and dollar roll income. While currently sustainable, this ratio has trended downward, signaling potential stress.

• Book Value Per Share (BVPS): A crucial valuation metric for mREITs. AGNC's BVPS has stabilized over the past two years but declined significantly over the last decade.

• Leverage Ratio: AGNC employs substantial leverage to enhance returns, which introduces risks, particularly in volatile interest rate environments.

Investment Highlights

Strengths

• Government-Backed Securities: AGNC primarily holds agency MBS, reducing credit risk due to the government guarantees.

• Strong Yield Appeal: High dividend yield appeals to income-seeking investors, particularly in a declining interest rate environment.

• Scale: As one of the largest mREITs, AGNC benefits from operational efficiencies and market expertise.

Weaknesses

• Dependence on Interest Rates: AGNC’s performance is highly sensitive to interest rate movements. Rising rates increase borrowing costs and compress margins, while falling rates can reduce the yield on newly acquired MBS.

• Dividend Sustainability: The company has a history of cutting dividends, making it less reliable for long-term income stability.

• Leverage Risks: Heavy use of leverage amplifies both potential gains and losses, exposing AGNC to significant risk during adverse market conditions.

Investment Thesis

Opportunities

• Declining Interest Rates: A falling interest rate environment can lower borrowing costs, improve net interest margins, and stabilize the book value of MBS holdings.

• Short-Term Gains: Investors could benefit from AGNC’s high yield and potential share price appreciation in a favorable rate environment.

Valuation

Price-to-Book (P/B) Ratio: A primary valuation measure for mREITs. AGNC is currently trading near or slightly above its book value, suggesting it may be fairly valued or slightly overvalued.

Dividend Yield vs. Risk: The high yield compensates for risk, but investors must consider dividend sustainability and the potential for capital erosion.

AGNC’s Investment Approach

AGNC invests predominantly in agency residential mortgage-backed securities (MBS), which are backed by government-sponsored enterprises like Fannie Mae, Freddie Mac, and Ginnie Mae. These securities are considered safer investments due to their government backing, which minimizes credit risk. AGNC finances its purchases using significant leverage, allowing it to generate high yields but increasing its exposure to risks like interest rate fluctuations and borrowing costs.

Current Performance and Challenges

While AGNC has delivered a year-to-date total return of over 15% (including dividends), the company has faced challenges, including declining income levels and a shrinking payout ratio. High interest rates in recent years have increased borrowing costs, reducing profits. However, as rates begin to decline, AGNC is positioned to benefit, with reduced funding costs potentially improving profitability.

Dividends and Risks

AGNC’s dividends represent the bulk of its returns. The company has maintained a high payout ratio (currently 83.7%) but has a history of dividend cuts over the last decade. Investors relying on dividend income should be aware that AGNC’s dividend sustainability could be challenged if earnings continue to decline. Furthermore, while agency MBS are safer than non-agency MBS, the leverage required to achieve high yields introduces significant risk, especially in volatile markets.

Long-Term Outlook

AGNC, like many mortgage REITs, has seen consistent declines in share price and book value over time. Although the company may perform well in the short term as interest rates drop, its long-term track record reveals a pattern of reduced dividends and shrinking share value. For investors considering AGNC as a long-term income source, the risk of continued dividend cuts and potential capital erosion must be weighed carefully.

Comparison: AGNC's Case

Earnings vs. Dividend Sustainability:

• Net Spread and Dollar Roll Income per Share (Key Metric): AGNC uses this metric to gauge its ability to pay dividends. For the latest quarter, this figure was $0.43, meaning the dividend payout of $0.36 per quarter represents 83.7% of earnings.

• While this payout ratio is sustainable in the short term, a high payout ratio leaves little room for error if earnings decline further.

Recent Trends:

• Over the past few years, AGNC's earnings (Net Spread and Dollar Roll Income) have been declining due to rising interest rates, causing a narrowing spread between asset yields and borrowing costs.

• As a result, AGNC has had to cut its dividend multiple times over the last decade to align with reduced earnings.

Conclusion

AGNC could be a worthwhile speculative play or short-term holding for those seeking high income while interest rates are declining. However, for long-term investors or those relying on steady dividend income, caution is advised. Diversification and a thorough understanding of the risks associated with leveraged mortgage REITs are essential when considering AGNC as part of a portfolio.