AGNC Investment Up 11.8% in 3 Months: Is It Worth Buying?

AGNC Investment Corp. AGNC stock rallied 11.8% in the past three months. The company's shares have outpaced the 7.6% rally registered by the industry it belongs to and 9.2% growth of the Zacks S&P 500 composite.

Three Months Price Performance

Image Source: Zacks Investment Research

This publicly-traded mortgage real estate investment trust (mREIT) company offers favorable long-term stockholder returns with a huge dividend yield, which may compel many investors to buy the stock. However, the stock experienced some headwinds in the second quarter of 2024, which might raise concerns about its dividend sustainability.

Currently, the stock is trading 5% down from its 52-week high of $10.57 hit on Jul 17. Is now the right time to invest? To answer this, it's essential to delve into the details and evaluate various factors at play.

Q2 Result: A Shift in Momentum

AGNC Investment's financial results dipped in the second quarter. The company reported a comprehensive loss of 13 cents per share against 48 cents of comprehensive income registered in the first quarter. Net spread and dollar roll income of 53 cents was down from 58 cents in the previous quarter.

Meanwhile, AGNC's tangible book value per share fell 5%. This reduction, together with dividend payments of 36 cents for the quarter, resulted in a negative 0.9% economic return on tangible common equity for the period.

The negative return and falling profitability may raise worries about AGNC Investment's capacity to sustain its high-yielding payment. The company's leverage ratio increased from 7.1 in the first quarter to 7.4 in the second quarter, which could exacerbate concerns. Despite this, the company concluded the period with strong liquidity of $5.3 billion, which should alleviate some concerns about its capacity to maintain its dividend in the short term.

Impressive Payout

Income-seeking investors have a large appetite for REIT stocks, as U.S. law requires REITs to distribute 90% of their annual taxable income in the form of dividends. As for AGNC, the company has a record of paying monthly dividends.

AGNC's current dividend yield is 15.1%. This is impressive compared with the industry's average of 10.3% and attracts investors as it represents a steady income stream.

AGNC is not the only dividend-paying stock among Zacks Industry – REIT and Equity Trust. Stocks like Annaly Capital Management NLY and Ellington Credit Company EARN are also providing investors with solid dividend options.

NLY has an annual dividend yield of 13.1%, while EARN has a dividend yield of 13.7%.

Coming back to AGNC, dividends aside, it has a share repurchase plan in place. In 2022 and 2021, AGNC Investment repurchased 4.7 million shares and 17.7 million shares for $51 million and $281 million, respectively. With no repurchases done in the first half of 2024, $1 billion remained under this program for repurchase through Dec 31, 2024. It plans to buy back shares only when the repurchase price is lower than the then-current estimate of tangible net book value per common share. The buyback program will enable it to respond to the volatility in its stock and boost shareholders' wealth.

Favorable Long-Term Outlook

AGNC Investment primarily focuses on leveraged investments in Agency residential mortgage-backed securities. That includes residential mortgage pass-through securities and collateralized mortgage obligations. A U.S. Government agency or a U.S. Government-sponsored enterprise guarantees the principal and interest payments for such investments.

AGNC Investment borrows against its investment portfolio under a master repurchase agreement, which provides short-term financing. The company expects to make a profit and pay the dividend from the net interest income (NII), which is the difference between interest earned on investments and its cost of borrowing.

The long-term outlook for Agency MBS remains favorable. Agency MBS spreads have remained in a range that supports positive long-term risk-adjusted returns for leveraged investors like AGNC. At these levels, Agency MBS provides a significant incremental yield over both US Treasuries and investment-grade corporate paper, which will continue to drive demand for Agency MBS. Given the positive supply-demand dynamic for Agency MBS and the improved monetary policy outlook, both the present returns and future prospects for AGNC look favorable.

2024 Estimates Down

Over the past month, the Zacks Consensus Estimate for 2024 and 2025 earnings has moved downward, reflecting analyst bearish sentiments.

Estimate Revision Trend

Image Source: Zacks Investment Research

Unlocking Valuation

From a valuation standpoint, AGNC Investment appears inexpensive relative to the industry. The company is currently trading at a discount with a forward 12-month P/E multiple of 4.95X, significantly below the industry average of 8.44X. The stock is also significantly cheaper than its peer NLY and EARN current forward 12-month P/E of 7.41X and 6.65X, respectively.

Price-to-Earnings (Forward 12 Months)

Image Source: Zacks Investment Research

Consider Waiting for a Better Entry Point

The ultra-high dividend yield and regular payout look eye-catching for most investors watching for high-income funds. However, AGNC slashed its dividend to 12 cents from 16 cents in April 2020 and continued to pay the same amount in later periods. The company also has a history of cutting its dividend.

AGNC uses leverage to scoop returns and give dividends to investors, which act as an advantage and a disadvantage for the company, depending on the market scenario. Increasing interest rates may have two drawbacks. As a leveraged corporation, the company finds it challenging to hedge its portfolio due to unstable and fluctuating interest rates. Also, high rates enable it to enhance its portfolio yield by investing in mortgages with higher interest rates.

At the recently concluded two-day FOMC meeting, the Federal Reserve left the interest rates unchanged at a 23-year high of 5.25%-5.50%. Per the press conference following the meeting, the central bank has kept the doors open for the September rate cut. With the inflation numbers cooling down, market participants are expecting more cuts this year. This will turn out to be favorable for AGNC.

Yet, any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and deterioration of the generic financial conditions may affect the performance of the company's investments. In the past two years, there has been significant volatility in the financial markets. The increase in interest rates resulted in higher debt servicing costs and underperformance of fixed-income assets.

Considering the pros and cons of AGNC, we can conclude that investors should refrain from rushing to buy AGNC right now, just banking on its lucrative dividend. Instead, they should analyze the upcoming interest rate changes and the mortgage market closely for a more appropriate entry point. The stock's Zacks Rank #3 (Hold) supports our thesis.

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