Tuesday, March 24, 2009

AGNC Says Borrowing Getting Cheaper

AGNC recently declared its fourth consecutive dividend (the first of which was a partial-quarter result), while explaining that its cost of leverage has decreased -- suggesting a good future in its leveraged agency-backed portfolio of mortgage assets. AGNC's ACAS-supplied Chief Investment Officer stated this:
We've been able to take advantage of favorable market conditions to diversify away from 100% fixed rate MBS and construct a portfolio that we believe will better position us for today's dynamic market environment. As part of the portfolio adjustments, we were able to generate modest realized gains in the quarter to date.
-- Gary Kain
In other words, the portfolio now includes call options the company has written against its government-backed assets, and whenever AGNC gets called it realizes gains (else, it is not called and realizes the options premium). It's possible this effort to "diversify" means something else, but I haven't heard what that might be, so I conclude it's a signal that the success in the second half of last year to realize options premiums on respected portfolio content is continuing to be successful as the market remains concerned about asset quality and AGNC's government-backed portfolio continues to appear attractive to other investors.

I've heard complaints that AGNC's 1Q2009 85¢ dividend represents a "cut". Maybe, maybe not. First, although as a REIT AGNC must pay over 90% of earnings as dividends, AGNC need do this on an annual basis (and, like ACAS, is not obliged to do it on a quarterly basis). Keeping some retained earnings (we'll know more about whether this is the case when we see the 10-Q) is a much cheaper source of investment capital during the year than is borrowing the money (particularly during a credit crunch), and so long as AGNC is making a good return on its NAV, I'd as soon allow AGNC to retain realized earnings as long as it's allowed. Secondly, AGNC didn't have a 1Q2008 dividend to which to compare the recently-announced 1Q2009 85¢ dividend. The 2Q2009 dividend will be compared to a 31¢ partial-quarter dividend in 2Q2008, making comparison difficult. It's my hope that AGNC retains more of what it's allowed (to the extent it can still do so without paying taxes) so that we get the best return on AGNC-held funds.

I think the 4Q2008 dividend was likely a symptom of everyone wanting cash (you, me, and ACAS) during the panic, and AGNC's management consequently paying everything it was allowed to pay (or near it). Now that the panic is subsiding, I think retaining earnings is the more high-yield course for AGNC's shareholders and I applaud it. The news about improved leverage costs and the suggestion that additional business has longevity are all good data to hear.

I'm unsurprised that AGNC's shares are up 25¢ on the news.

I just wish I'd bought again when AGNC dipped below $15 in January ....

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