The marketplace dislocations from the early days of the COVID disaster are largely in the rearview mirror, and the property finance loan authentic estate financial investment trusts (mREITs) have mostly altered to the predicament. With interest premiums so lower, income can be hard to obtain, and it truly is building circumstances in which mREIT firms are often creating double-digit dividend yields. Why that’s occurring and what it genuinely signifies are well worth knowing.
The most conservative of these mREIT shares, AGNC Investment (NASDAQ:AGNC), just claimed that it has practically put the disaster guiding it. Does that mean a dividend hike could be in its in close proximity to long run?
“Almost reversed” the financial losses from COVID-19
AGNC Investment decision documented earnings of $1.28 for every share for the 3rd quarter ending Sept. 30. This is a lessen from the 2nd quarter, in which the organization attained $1.60 per share. In the push launch, CEO Gary Kain made available even more perception on this certain metric, indicating that AGNC experienced “approximately reversed” the economic decline in the first quarter stemming from the sector dislocations connected with COVID-19.
Tangible e book worth for each share rose 6.4% to $15.88 for every share. On the earnings convention get in touch with, Main Economic Officer Bernie Bell estimated that ebook value per share experienced improved by about 2% because the conclude of the quarter. Leverage fell from 9.2 occasions tangible reserve to 8.8 instances for the duration of the quarter, mainly owing to asset value appreciation.
AGNC’s financial investment portfolio remained mainly company mortgage loan-backed securities, which are assured by the U.S. govt. The in general agency book fell in measurement from $75 billion to $67 billion, although repurchase agreements, which are the primary supply of leverage, fell from $70 billion to $55 billion. AGNC offered quite a few of its greater coupon mortgage-backed securities and ordered lower coupon bonds as a way to protect versus prepayment risk. Prepayment chance signifies the chance that mortgage loan-backed securities get paid back early (due to the underlying property finance loan holders refinancing their mortgages).
Credit score chance remained limited, with only compact holdings (about $1 billion) of credit chance transfer securities and non-authorities assured mortgage-backed securities.
The problem of the dividend
AGNC Financial commitment paid out complete dividends of $.36 per share for the duration of the quarter and acquired back a complete of 11 million shares at an regular price tag of $13.95, for a total of $153.5 million. Subsequent to the conclusion of the quarter, the organization terminated a buyback system set to expire on Dec. 31 and introduced a new strategy to permit buybacks of $1 billion through the end of 2021.
Unfold earnings (which represents the interest earned minus the curiosity paid out on financing) came in at $.81 for every share for the quarter, which simply covered the dividend of $.36 for each share. One of the initial questions questioned on the earnings conference call worried the company’s programs with regards to the dividend. Kain experienced this to say with regards to the dividend:
…[W]e are seriously confident about the outlook for net distribute and greenback roll revenue. And indeed, we expect that evaluate to be well above the recent dividend for the foreseeable long term. … The selection regardless of whether to raise the dividend [and] by how a great deal we — or if we do is genuinely just a operate of evaluating the optimal, or acceptable cushion definitely involving expected earnings and the dividend. … I suggest the most vital factor here is, this is a excellent challenge to have as we’re presently paying and easily as you mentioned, a dividend in excessive of 10% which is really appealing in present day atmosphere. Whilst we are developing e book benefit, and we are obtaining again our inventory.
On the next-quarter earnings connect with, Kain explained that in retrospect the dividend reduce (of $.15 for every share regular monthly to $.12 regular) was “pointless.” Offered the measurement of the declared buyback, it seems to be like AGNC will be content to carry on to order stock at down below e-book worth nonetheless, the corporation does have the respiration room for a dividend hike. Having the company’s 2% enhance in e-book price given that the close of the quarter, AGNC is investing at a 13% discounted to guide benefit and has a 10% produce.
This mREIT stock signifies price as properly as cash flow. It is just one of my CAPS picks.