AGNC Investment Corp. (NASDAQ: AGNC) is a real estate investment trust (REIT) that doesn't own real estate, at least not directly. With a market cap of $8 billion, AGNC is the largest internally managed residential mortgage REIT. It makes its money in single-family residential mortgage pass-through securities and collateralized mortgage obligations that are guaranteed by the U.S. government.
Based in Bethesda, Md., the firm has its own broker-dealer subsidiary -- Bethesda Securities Corp. -- giving it direct access to Fixed Income Clearing Corp., a plus when it comes to efficiencies in what can be complicated machinations behind the scenes in these kinds of investments.
That's reflected in an operating expense structure of about 0.8% of total equity capital, which AGNC says gives it one of the lowest cost structures as a percentage of stockholders' equity in the residential mortgage REIT space.
A "very favorable environment" for its business components
That kind of efficiency matters bigly when a company makes its living trading on the spread between its cost of capital and the interest it earns on the mortgage securities it buys. That would seem even tougher when interest rates are so low.
To AGNC's president and chief operating officer, this is a good thing. "The broad availability of funding at rates near zero and muted interest rate volatility create a very favorable environment for the three primary components of our business – asset performance, cost and availability of financing, and risk management," Peter Federico said in AGNC's second quarter earnings report.
"As such, we expect the earnings environment for Agency MBS to remain favorable for the foreseeable future despite the ongoing economic uncertainties associated with the COVID-19 pandemic," Federico said.
As of June 30, the company said in its 2Q report, $75.8 billion of its $97.7 billion portfolio is invested in a range of agency securities, comprising mortgages backed by Ginnie Mae, Fannie Mae, or Freddie Mac.
Taking stock of its performance and yield
AGNC stock has been trading at between $13 and $14 a share for the past several weeks after plunging from a 52-week high of $19.65 in February to as low as $6.25 in April as the pandemic did its damage to the overall stock market.
The company also declared a second-quarter cash dividend of $0.12 per share for the second quarter, giving it a current forward annualized yield of a handsome 10.42%, but that, of course, is influenced by its currently somewhat depressed stock price.
In fact, as pointed out in a Motley Fool analysis in June, AGNC's dividend payout per share peaked at $1.50 in 2009, about a year after its IPO, and it has cut dividends multiple times since then, taking the annualized rate down to $1.44. The stock price itself has seen a similar trajectory.
Taking stock of its own stock
AGNC's board has authorized the company to buy up to $1 billion of its own common stock through the end of the year, and it did buy 12.2 million shares, or $147 million worth, at an average price of $11.99, in the second quarter. It has another $750 million remaining available for repurchase.
"The company intends to repurchase shares under the stock repurchase program only when the repurchase price is less than its then-current estimate of its tangible net book value per common share," AGNC says in its 2Q report.
With an estimated tangible net book value of $14.84 per common stock share as of July 31, and its stock currently back near that level, it doesn't look like repurchases are a given, but it's good to know the cash is there to underpin other investors if the stock price does dip.
But even that, and a solid second-quarter performance given the perils of the pandemic, doesn't make this seem like a promising issue.
Why it's a pass for now
That's for three basic reasons:
1) If you're concerned that there's a bubble forming around the residential housing market, by both soaring prices for new purchases and refinances and the threat of massive foreclosures that could follow the millions of loans coming out of forbearance. Uncertainty is usually not an attractive asset.
2) While agency issues are government-backed, rising interest rates can still impact that niche, especially if it results in the Fed easing up on the buying it's been doing to stimulate with liquidity.
3) If you're buying this REIT for its dividends. And isn't that primarily why we buy REITs, for the income stream?
AGNC says it uses careful asset selection, disciplined hedging, and diversified funding to manage risk in the complicated world of collateralized mortgage securities packaging, buying, and selling.
Risk is one thing. Reward is another. If the experience this mortgage REIT gained navigating its way through the chaos of the housing crisis and the Great Recession is a tipping point for you, then AGNC certainly does deserve consideration for some of your investment dollars.
Maybe on the next big dip. But for now, for me, there's just too much uncertainty for the dividends it's been paying.