Yesterday, American Capital Agency Corp. (NASDAQ:AGNC), along with its hybrid peers, announced their second quarter dividends. American Capital Agency Corp. (NASDAQ:AGNC) reported a dividend rate of $1.05 per share after a 16% cut, while the rest maintained their dividends. Let’s see what the primary factors were behind American Capital Agency Corp. (NASDAQ:AGNC)’s poor 1Q performance, which resulted in the dividend cut. Also, let’s see how the management at American Capital Agency Corp. (NASDAQ:AGNC) has ensured its future dividends and book value will be secure.
Poor first quarter
The company, which performed better than its peers during the third and the fourth quarter of the prior year, reported a poor first quarter. The primary factor for this poor performance was that the management at American Capital Agency Corp. (NASDAQ:AGNC) was not prepared for the rising interest rate environment.
The company had designed an asset portfolio that benefited it during the third and fourth quarters of the prior year, when the long-term rates touched their lowest in the recorded history. However, as a result of the speculation arising from the release of the minutes of the prior Federal Open Market Committee’s (FOMC) meeting, interest rates started climbing. The markets started pricing in the effect of the Fed’s exit, while American Capital Agency Corp. (NASDAQ:AGNC) was not prepared.
American Capital Agency had acquired securities with high prepayment protection attributes at premium prices, thinking rates would fall further. This, they anticipated, would further encourage refinancing activity. However, that didn’t happen, and rates started climbing, causing American Capital’s securities to fall in prices faster than its peers’. As a result, American Capital reported a 9% decline in its book value at the end of the first quarter, compared to the 8% and 4% reported by ARMOUR Residential REIT, Inc. (NYSE:ARR) and Annaly Capital Management, Inc. (NYSE:NLY), respectively.
Should you worry about American Capital’s future?
I have reason to believe that you should not worry about American Capital’s future, particularly its dividend distributions. That’s because it’s one of the most well managed mREITs in the sector and, looking at the situation, the management at American Capital has already rebalanced its assets portfolio to better suit the current environment.
At the end of the most recent quarter, around 70% of the company’s entire investment portfolio was composed of 30-year fixed rate MBS. This security is highly sensitive to changes in interest rates because it has a longer duration. With the increase in interest rates, the price of this security falls faster than any other security held by American Capital. Therefore, American Capital reduced its exposure in this security. Besides, it announced the active management of its assets and hedges, which is critically important given the volatility in rates.
In short, American Capital Agency has taken steps to ensure that its book value and future dividends are secured.
Other dividend announcements
New York Mortgage Trust, Inc. (NASDAQ:NYMT) is a hybrid mREIT. At the end of the first quarter, only 30% of its equity was allocated to Agency residential MBS, while it also invests part of the remaining equity in distressed residential loans, multi-family CMBS etc. This variety of assets allowed the company to maintain its dividends. It declared a dividend of $0.27 per share for the second quarter, in line with the first quarter shareholder distribution. The stock now yields 15.3%.
Hatteras Financial Corp. (NYSE:HTS), another hybrid mREIT, maintain its quarterly divided rate of $0.70 per share for the second quarter of the current year. The stock now yields 11%. However, this is not the only positive news from Hatteras Financial Corp. (NYSE:HTS). The company’s board has authorized a stock repurchase program to purchase up to 10 million common share of Hatteras Financial Corp. (NYSE:HTS). This will have the effect of increasing the stock price further. The company benefited significantly from the design of its investment portfolio. Around 90% of its entire portfolio is composed of adjustable-rate mortgages (ARMs), which adjust their payments to the more current interest rates at the next reset date. The remainder of the portion is the 15-year fixed rate security. It has no 30-year fixed rate MBS in its portfolio, which are considered highly sensitive to changes in interest rates.
Conclusion
The future might still not be very rosy for the mREITs sector, particularly the Agency mREITs. However, American Capital Agency has taken steps to protect the further decline in its book value and dividends. Having said that, hybrids remain my favorite mREITs under the prevailing volatile conditions.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Adnan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
The article American Capital Agency Dividend Cut: Should You Worry? originally appeared on Fool.com is written by Adnan Khan.
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