High dividend stocks - American Capital Agency Corp. (AGNC) dividend record

August 20th, 2010
 
American Capital Agency Corp.  (Public, NASDAQ:AGNC) often appears at the top of high dividend yield lists.  I'll bet you are wondering if its 20.76% dividend yield will last or whether to add it to your best dividend stocks portfolio.  To satisfy your curiosity I'm going to use Benjamin Graham's security analysis methods over the next few days or perhaps weeks to value AGNC.

 

My valuation of AGNC will be divided up into three parts:

1. The dividend rate and record
2. Income-account factors (earning power)
3. Balance-sheet factors (asset value) 

Here is the company description from Google Finance, "American Capital Agency Corp. (AGNC) is a real estate investment trust (REIT). AGNC earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations. These investments consist of securities, for which the principal and interest payments are guaranteed by United States Government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or by a United States Government agency, such as the Government National Mortgage Association (Ginnie Mae). The Company is externally managed by American Capital Agency Management, LLC, a subsidiary of a wholly owned portfolio company of American Capital, Ltd."

 

So it is a real estate investment trust.  I'll delve into how exactly they make their income in part II of this analysis.  REIT must pay 90% of their taxable income to shareholders.  Taxable income is usually lower that total income.  That's why you'll see dividend payout ratios in the 70% range below in the dividend record section of this post.

 

Oh yeah, I almost forgot.  This company went public in mid-2008 so there is only two years of dividend history to examine.  Let's get right to it.  All the dividend information came out of the company's 2009 annual report and its most recent 10-K filing for the period ending June 30th, 2010.

 

DIVIDEND RATE
Dividend: $1.40 per quarter
Dividend yield: 20.76% annualized

 

Now that is a huge dividend!!  You could make 4-6% in just one quarter.  The heavy analysis on whether that dividend is sustainable will come later, but for now let's just stare at that huge yield for a moment.  Are people just bypassing this stock because it looks too good to be true?  AGNC has paid a $1.40 dividend per quarter for the last four quarters.

 
DIVIDEND RECORD

I would get to concerned with the dividend increases and dividend cuts here because REIT have to payout at least 90% of their taxable income as dividends.  Other companies that don't have that requirement have more freedom to payout very little and make puny increases.  When one of those companies cuts its dividend it is more indicative of possible earnings problems.

 

The only thing that worries me about AGNC's dividend record is the 114% payout ratio this past quarter.  You can see that in the 4th quarter of 2008 the payout ratio reached 164%.  The company cut the dividend from $1.20 to $0.85, but they can't cut too much otherwise they won't qualify as a REIT.  Therefore, the real analysis must focus on the earning power of the company.  The question is what is AGNC going to earn in the 3rd and 4th quarter of 2010?  If we can deduce that, then we'll have a better idea of where the yield is heading.  We can be fairly certain that the dividend payout ratio will return to the 70-80% range.

 

Here is some basic info on AGNC that I'll start with in my next post at My High Dividend Stocks Blog regarding AGNC's earning power.

 

Today's closing price: $26.98 -0.02 (-0.07%) 
Today’s range: $26.91 - $27.15
Volume: 753,524.00
Average volume: 673,000
 
Mkt cap: 908.15M
P/E: 3.87
EPS: $6.97
Shares: 33.66M
 
52 week range $23.41 - $31.42