American Capital Agency Corp.
), a mortgage REIT (mREIT) firm, finally announced the
much-awaited dividend cut. Over the past six weeks the stock
witnessed a substantial decline (down 23.4% since May 2, 2013)
owing to apprehensions over a rising interest rate and a negative
impact on the book value.
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In particular, American Capital Agency slashed its quarterly
dividend rate by 16%. The company will now pay a second-quarter
dividend of $1.05 per share instead of the prior dividend rate of
$1.25. The revised dividend will be paid on Jul 26 to
shareholders of record as of Jun 28.
How Rising Interest Rates Hurt mREITs?
Usually, mREITs invest in mortgage backed securities and use
short-term debt for financing their purchases. They make money
from the spread and are generally highly leveraged.
In the past couple of years, with low short-term rates and
quantitative easing policies (QE), mREITs have benefited from
lower borrowing cost, leading to higher yields. Through
interventions in the long-term mortgage and treasury bonds
market, the Fed also managed to keep the long-term interest rates
As REITs are required to pay out 90% of their earnings to
shareholders for favorable tax treatment, the mREITs ended up
paying double-digit yields, which easily surpassed the returns
from the Treasury bonds. Thus, high-yield seeking investors
showed preference for mREITs over bonds.
However, the situation reversed and presently amid apprehensions
of the Fed pulling out its QE program and increasing yields on
the U.S. Treasury 10-year note (2.17% as of Jun 17, 2013,
compared with 1.68% at the end of April), investors are favoring
the relatively risk free treasury notes and discarding their
investments in mREITs.
As a result, the stock prices of the mREITs have registered a
significant decline since May. Subsequently, the FTSE NAREIT
Mortgage REITs total returns dropped 12.91% from the beginning of
the second quarter till Jun 17, 2013.
American Capital Mortgage Investment Corp.
) also joined the bandwagon of slashing dividend payout. It
reduced dividend by over 11% to 80 cents from 90 cents paid
Amid speculations of rising rates and the Fed's QE program pull
out, we expect the mREITs stocks to continue losing shine.
However, we note that even after the dividend cut at American
Capital Agency, the company still ranks among the regular
dividend payers. At the new rate, the annualized dividend stands
at $4.20, representing a yield of 16.6% based on the closing
price of Jun 18.
American Capital Agency currently has a Zacks Rank #3 (Hold).
However, two other mREITs that are performing well and deserve a
Five Oaks Investment Corp.
) with a Zacks Rank #1 (Strong Buy) and
iStar Financial Inc.
) having a Zacks Rank #2 (Buy).