With a ahead dividend yield of about 14%, AGNC Funding (AGNC 1.82%) is a inventory that possible reveals up on lots of income-focused traders’ radars. The mortgage actual property funding belief (mREIT), which buys authorities company mortgage-backed securities (MBS), has had a tough few years on account of rising rates of interest which have diminished the worth of its holdings.
With the mREIT not too long ago reporting its second-quarter outcomes, let’s have a look at if there are indicators of a turnaround forward.
Declines in e book worth return
The largest subject dealing with AGNC over the previous few years is the drag that increased rates of interest have had on its MBS portfolio, which is mirrored in its tangible e book worth (TBV).
From the tip of 2021 till the tip of 2023, the mREIT noticed its TBV decline from $15.75 per share all the way down to $8.70 on the finish of 2023 — an enormous 45% drop. Mortgage REITs are usually valued at a a number of of their e book values, so not surprisingly, the inventory value adopted its TBV down.
Over the 2 quarters previous to its most-recent outcomes, AGNC had seen its TBV start to bounce again, going from $8.08 per share on the finish of the third quarter of 2023 to $8.84 on the finish of the primary quarter of 2024.
Nonetheless, TBV declined to $8.40 when the corporate reported second-quarter outcomes. It mentioned the drop stemmed from cooling inflation within the quarter and company MBS spreads widening versus Treasury yields. In different phrases, as inflation cooled, Treasury rates of interest fell whereas MBS costs remained elevated.
Anticipating a number of Fed charge cuts
Nonetheless, administration remained optimistic in regards to the government-agency MBS market over the long run, noting that the Federal Reserve forecast nonetheless predicts 9 charge cuts over the following two years. And the corporate believes that demand for government-agency MBS will start to enhance because the panorama for banking rules turns into clearer.
The corporate mentioned that for the reason that quarter ended, its e book worth has risen by about 2%. Considering dividend accruals, e book worth can be up about 1%.
Taking a look at different necessary metrics within the quarter, AGNC had an improved common internet curiosity unfold of two.69%, in comparison with 3.26% a 12 months in the past and a couple of.98% within the first quarter. The mREIT has carried out job in preserving its funding prices down by hedging. It mentioned in the course of the quarter that it continued to regularly shift towards swap-based hedges.
Total, AGNC generated $0.53 per share in internet unfold and greenback roll (a hedging technique equal to quick promoting however particularly employed in MBS markets to keep away from losses when MBS values decline) revenue, which it makes use of to pay out its dividend. It generated a adverse 0.9% financial return on its tangible widespread fairness, with its TBV falling $0.44 per share whereas it paid out $0.36 per share in dividends in the course of the quarter.
AGNC ended the quarter with increased debt, with 7.4x tangible internet e book worth “in danger” leverage (debt + internet receivables or payables for unsettled funding securities excellent/shareholder fairness excluding goodwill). That compares to 7.1x on the finish of the primary quarter and seven.2x a 12 months in the past. Nonetheless, the mREIT has carried increased leverage prior to now, and in a greater atmosphere, has the chance to extend the leverage to bolster returns.
It issued $434 million in inventory within the quarter by an at-the-market (ATM) inventory program. When mortgage REITs promote shares above e book worth, it helps enhance e book worth and will be accretive to earnings if invested in securities with enticing yields. As such, fairness raises for mREITs should not have the identical sort of adverse dilutive connotations as they do for normal corporations.
Picture supply: Getty Pictures
Are higher days forward for AGNC?
Even with the decline in TBV, the worst does seem like over for AGNC. The MBS market has settled right into a steadier vary, whereas the opportunity of extra rate of interest hikes appears extraordinarily low.
To essentially get the inventory transferring, although, the mREIT would significantly profit from the Fed beginning to decrease charges. Much like how the worth of AGNC’s portfolio declined because the Fed aggressively raised rates of interest, its worth ought to enhance as rates of interest decline. Whereas the beginning of Fed rate of interest cuts has taken longer than first predicted, economists nonetheless typically anticipate it to start out reducing charges beginning in September and regularly proceed all through 2025.
AGNC price-to-tangible-book-value information by YCharts.
That will be nice information for AGNC and its traders. The inventory presently trades at 1.2 instances TBV, which is towards the excessive finish of the valuation vary it has usually traded round. Nonetheless, with TBV set to extend with decrease rates of interest and the inventory paying $0.36 in dividends per quarter, now seems like time so as to add the inventory earlier than the Fed begins easing charges, for the reason that inventory traditionally has carried out very nicely throughout easing cycles.
