Undervalued, 14.3%-Yielding AGNC Stock Has 19% Upside
January 5, 2024
Why AGNC Stock Is Up Since November
Marty Zweig was a famed American investor and market forecaster. You might not remember him, but you’re probably familiar with one of his most famous axioms: “Don’t fight the fed.” He coined the phrase in the 1970s, noting that the Federal Reserve’s policy has an overarching correlation with the direction of the stock market.
You can see this play out with AGNC Investment Corp (NASDAQ:AGNC). The company is a real estate investment trust (REIT) that invests primarily in residential mortgage-backed securities.f
Mortgage-backed securities played a big role in the 2008/2009 financial crisis, so investors might feel a little nervous about mortgage REITs (mREITs), but AGNC doesn’t invest in all types of mortgage-backed securities.
Its main focus is residential mortgage-backed securities (MBS) that are guaranteed by the Government National Mortgage Association (Ginnie Mae), the Federal National Mortgage Association (Fannie Mae), or the Federal Home Loan Mortgage Corporation (Freddie Mac). (Source: “Q3 2023 Stockholder Presentation,” AGNC Investment Corp, October 31, 2023.)
As of September 30, 2023, its $59.3-billion investment portfolio comprised the following:
- $55.9 billion worth of agency MBS
- A $2.4-billion net to-be-announced mortgage position
- $1.1 billion worth of credit risk transfers, non-agency securities, and other mortgage credit investments
With principal and interest payments guaranteed by a U.S. Government-sponsored enterprise or U.S. Government agency, these securities can provide a predictable income stream to AGNC.
I say “can,” not “will,” because AGNC Investment Corp is still susceptible to domestic and global economic factors, especially the Fed’s monetary policy, which has a direct impact on Treasury securities and other fixed-income markets.
Case in point, for the third quarter of 2023, AGNC announced a net loss of $1.02 per share, compared to earnings of $0.32 per share in the same prior-year period. (Source: “AGNC Investment Corp. Announces Third Quarter 2023 Financial Results,” AGNC Investment Corp, October 30, 2023.)
At the time, the company’s president and CEO, Peter Frederico, said, “In environments in which Treasury securities experience considerable price instability and the market struggles to find a new equilibrium, Agency MBS typically underperform, which was indeed the case in the third quarter.” (Source: Ibid.)
On the plus side, Frederico also said, “As challenging as this period has been for all bond market participants, the current opportunity for both levered and unlevered investments in Agency MBS remains historically attractive on both an absolute and relative basis. Once the uncertainties associated with the current market environment subside, we believe that a durable and attractive investment environment will emerge.”
AGNC Stock Rallied on Fed Discussions
The uncertainties that Frederico mentioned were tested just two days later. On November 1, the Fed left its key interest rate unchanged. (Source: “November 2023 Fed Meeting: Rates Hold steady,” JPMorgan Chase & Co, November 2, 2023.)
Although the U.S. economy had slowed at the time, future rate hikes were still on the table. Wall Street, however, took it as a sign that the Fed was done raising interest rates during this cycle and that it would probably begin cutting its rates in 2024.
At its December meeting, the Fed held its key lending rate at the range of 5.25% to 5.5%. This time, though, the Fed signaled that multiple rate cuts were likely on the table in 2024. (Source: “December Fed Meeting: Officials Anticipate 3 Rate Cuts in 2024,” Forbes, December 13, 2023.)
Both of the Fed’s announcements had huge impacts on AGNC Investment Corp’s share price.
As you can see in the chart below, AGNC stock took a big tumble in the second half of October and didn’t move after the mREIT announced a big third-quarter net loss. But after the Fed’s announcement on November 1, the stock advanced 21.6%.
From December 1 to 27, AGNC stock rallied by 12.3%, for a two-month gain of approximately 39%.
Despite the company’s big share-price gains and its third-quarter loss, Wall Street analysts are bullish on AGNC Investment Corp. They’ve provided a 12-month high share-price target of $12.00 for AGNC stock, which points to gains of 19%.
Chart courtesy of StockCharts.com
Management Holds Monthly Payouts at $0.12 Per Unit
Because AGNC Investment Corp is regulated as a REIT, it’s legally required to return at least 90% of its taxable profits to investors through dividends.
The company currently pays monthly dividends of $0.12 per share, which, as of this writing, comes out to a yield of 14.3%. (Source: “Dividends,” AGNC Investment Corp, last accessed December 28, 2023.)
How can the company maintain those monthly dividends when it reports losses? In 2022, it had a $3.11 net spread and dollar roll income per share and declared $1.44 in dividends. A dollar roll is a trade that shorts MBS, generating profits when the value of MBS securities fall.
In the third quarter of 2023, AGNC Investment Corp generated $0.65 per share in net spread and dollar roll income. This was in excess of its $0.45 in monthly dividends in the third quarter.
Since its initial public offering (IPO) in May 2008, the mREIT hasn’t missed a dividend, although it has reduced it, most recently during the COVID-19 pandemic.
Still, since its IPO, AGNC stock has returned a total of $46.84 per share (as of this writing).
The Lowdown on AGNC Investment Corp
AGNC stock is a great mREIT play that saw its share price and monthly dividends take a hit during the opening months of the pandemic and over the last two years.
Note that, since 2022, the Fed has raised its interest rates 11 times. But with the rate-hike cycle likely over and rate cuts expected in 2024, the macroeconomic and microeconomic outlook for AGNC Investment Corp and other mREITs is robust.
As the company’s president and CEO said, “Once the uncertainties associated with the current market environment subside…a durable and attractive investment environment will emerge.”
And Wall Street analysts agree.
