With leveraged returns and a dividend yield still greater than its peers, I believe American Capital Agency Corp. (NASDAQ:AGNC)should trade at a premium to other Agency mREITs.
High quality non-Agency MBS
Invesco Mortgage Capital Inc (NYSE:IVR) is a hybrid mortgage REIT with investments in residential Agency and non-Agency MBS. It also has investments in commercial MBS. While hybrids are the preferred type of mREITs under the prevailing macroeconomic environment, Invesco Mortgage is not scheduled to benefit as much because of the nature of its non-Agency holdings.
The company owns high quality non-Agency residential MBS, which are less credit-sensitive and more sensitive to changes in the interest rates. Therefore, the company’s non-Agency allocation will not be able to offset the losses within its Agency holdings as much as some hybrid competitors. In the past too, only the commercial MBS held by Invesco helped the company to protect or grow its book value. However, that’s not going to happen this time as this asset class has suffered losses in the current quarter.
Therefore, I would suggest investors stay away from this hybrid mREIT.
Extended duration gap
Among the entire Agency mortgage REITs sector, ARMOUR Residential REIT, Inc. (NYSE:ARR) is in a lot of trouble as it has seen the greatest volatility in its book value. Over the past eight months, its book value plunged 23%. The company has also extended its asset-liability duration gap from 0.2 years at the beginning of May to 1.47 years at the start of June. While further extension in duration gap is highly unlikely under the given circumstances, the present gap is enough to produce another significant decline in the company’s book value it rates continue to rise.
The extended duration gap combined with the recently acquired new production MBS, which perform worse with rising interest rates, will heighten book value volatility. Therefore, I suggest you stay away from ARMOUR Residential.
Conclusion
I believe the management’s recent actions will definitely hinder American Capital Agency Corp. (NASDAQ:AGNC)’s future earnings potential, which could hurt its dividend prospects. While the leverage earnings and the dividend yield are still above its peers, I recommend investors stay away from the stock on concerns of another book value decline. Additionally, ARMOUR Residential’s extended duration gap and Invesco Mortgage’s higher quality non-Agency MBS will cause headaches for both companies.
There’s no question Annaly Capital’s double-digit dividend is eye-catching. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line.
Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Barclays Is Bearish on American Capital Agency originally appeared on Fool.com.
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