AGNC Investment Corp. AGNC is gaining momentum with declining mortgage rates, driven by optimism surrounding interest rate cuts by the Federal Reserve.
The much-awaited easing monetary policy by the Fed pulled the yields on long-term bonds lower, leading to a drop in mortgage rates. During the Sept. 17-18 FOMC meeting, the Fed lowered the interest rate by 50 basis points after more than four years, while signaling two more this year and four in 2025. The Fed fund rates are currently in the 4.75-5% range.
AGNC is one of the mortgage real estate investment trust (mREIT) stocks burdened by the higher interest-rate regime. With an improving market scenario and rate cuts, investors are turning optimistic about AGNC stock. In the past six months, shares of AGNC have rallied 13.9% compared with the industry’s growth of 5.7%.
Six-Months Price Performance
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The stock is also trading above the 50-day SMA, representing a bullish trend.
50-Day Moving Average
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In the current situation, should investors consider AGNC? Before making any hasty decision, it would be prudent to take a look at the reasons behind the surge, the stock’s growth prospects as well as risks (if any).
Rate Cuts to Support AGNC’s Performance
AGNC’s financials have been adversely impacted since early 2022 when the Fed began its interest rate hiking cycle. The negative return and falling profitability raised concerns about the company’s Investment's capacity to sustain its high-yielding payment.
At the end of the six months ended June 30, 2024, AGNC's borrowing costs rose significantly, as interest expenses ballooned from $107 million to $1.4 billion at the end of six months ended June 30, 2022. The company had a net interest loss of $33 million at the end of six months ended June 30, 2024, against $763 million of net interest income registered at the end of six months ended June 30, 2022.
High rates also impacted the book value of AGNC's investments due to spread risk. From June 30, 2022, to June 30, 2024, the company’s book value per share declined by 36.8%.
As the central bank lowered the rates, long-term bond yields declined, resulting in a fall in mortgage rates. Per the Freddie Mac report, the average rate on a 30-year fixed-rate mortgage dropped to 6.12% as of Oct. 3, 2024, from 7.49% a year ago.
With the Fed indicating more rate cuts this year and in 2025, this should help boost AGNC's net interest spread and the book value of its portfolio. This will provide the company and the stock a much-needed boost going forward.
Sales Estimates for 2024 & 2025
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With the falling rate, the earnings pressure for AGNC will also reduce, as funding costs come down. This will help the company to increase its dividend payout.
AGNC’s Attractive Payout
This publicly traded mREIT offers a lucrative dividend yield.
As the rate cuts will support AGNC’s financials, it can continue to pay dividends to its shareholders.
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 13.95%. This is impressive compared with the industry’s average of 11.2% and attracts investors as it represents a steady income stream.
Dividend Yield (TTM)
AGNC Investment Corp. dividend-yield-ttm | AGNC Investment Corp. Quote
AGNC is not the only dividend-paying stock among Zacks Industry – REIT and Equity Trust. Companies like Annaly Capital Management NLY and Ellington Credit Company EARN also provide investors with solid dividend options.
NLY has an annual dividend yield of 13.2%, while EARN has a dividend yield of 14.2%.
AGNC has solid access to attractive funding across a broad spectrum of counterparties and financing conditions. As a result, it has flexibility in the opportunistic enhancement of its portfolio. As of June 30, liquidity including cash and unencumbered Agency assets, was $5.3 billion. This should alleviate some concerns about its capacity to maintain its payout.
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 2023 and 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.
Unlocking AGNC’s Valuation
From a valuation standpoint, AGNC Investment appears expensive relative to the industry. The company is currently trading at a premium with a forward 12-month price-to-tangible book (P/TB) multiple of 1.18X, above the industry average of 0.98X.
Price/Tangible Book TTM
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The stock is also more expensive than its peers, with NLY's current forward 12-month P/TB of 1.01X while EARN has current forward 12-month P/E of 0.94X.
How to Play AGNC Stock?
The ultra-high dividend yield and regular payout look eye-catching for investors watching for high-income funds. The Fed's adjustment in monetary policy should boost AGNC’s net interest spread and the book value of its portfolio.
That could be a strong tailwind for the company in the upcoming period.
However, volatility in the mortgage market, unfavorable changes in the shape of the yield curve and deterioration of the generic financial conditions might affect AGNC's performance. The company has a track record of lowering dividends during stressful times.
To conclude, investors interested in AGNC should wait for a better entry point, considering its premium valuation. They should analyze the company’s upcoming earnings release and market volatility closely for a more appropriate entry point. The stock’s Zacks Rank #3 (Hold) supports our thesis.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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