2011: Another Turbocharged Year for American Capital Agency

As 2011 draws to a close, it's worth it to take a peek at our investments to see what's working and what's not.

That's what we aim to do today, as we pull out the instant replay and consider the year that was at American Capital Agency (Nasdaq: AGNC  ) .

A few Foolish facts about American Capital

2011 Stock Return (2%)
P/E 4.6
Dividend Yield 19.8%
1-Year Earnings-Per-Share Growth (9%)
1-Year Book Value-Per-Share Growth 15%
CAPS Rating (out of 5) ****

Data from Morningstar, S&P Capital IQ, and Motley Fool CAPS.

What happened at American Capital this year?
American Capital's stock didn't make it a three-peat year, after the enormous gains in 2009 and 2010 -- it's first two years of inception. But investors buy mortgage REITs for their yields, and American Capital delivered a turbocharged one, continuing to make quarterly dividend payouts of $1.40.

Residential mortgage REITs like American Capital have hit a bonanza over the past few years. As the Federal Reserve lowered overnight interest rates to nearly 0% to support the struggling economy, American Capital's cost of borrowing has held much lower than it otherwise would have, boosting its interest-rate spread.

American Capital focuses on ultra-safe "agency" mortgages, which have government guarantees. This results in a relatively narrow interest-rate spread by industry standards (though it is wide by historical standards). American Capital makes up for the difference by taking on more leverage. Take a look at how this comparison plays out within the industry.

Company

Interest-Rate Spread

Leverage

Dividend Yield

Chimera (NYSE: CIM  ) 4.9% 2.9 times 17.3%
Invesco (NYSE: IVR  ) 2.4% 7.3 times 18.7%
Armour Residential (NYSE: ARR  ) 2.2% 11.1 times 18.8%
Annaly Capital (NYSE: NLY  ) 2.1% 7.2 times 14.2%
American Capital 2.1% 9.5 times 19.8%

Source: S&P Capital IQ, as of most recent quarterly data.

It's this huge leverage that allows American Capital to continue to post such an enormous yield in a year when Chimera and Annaly had to slash their payouts. Of the two companies that didn't have to make cuts, Armour went the leverage route, while Invesco is like Chimera in that it has a bit more portfolio flexibility.

While still high by absolute standards, American Capital's spread was hit hard in 2011, falling to 2.14% its mid-year level of 2.58%. Falling long-term interest rates, which reduce mortgage REITs' income, have taken a bit of a toll on virtually the entire industry (except the odd duck Chimera.)

American Capital ratcheted up its stock-issuing spree, with sales of $3.3 billion in 2011, on top of the $1 billion it sold in 2010. For a company that began the year with $1.6 billion in equity, that's huge. But with an average price-to-book multiple of 1.1 in 2011, the move may not be as reckless as it may seem.

Steady as she goes
For 2011, American Capital took some light blows to its spread and brought its leverage back up to its usually turbocharged levels. The Fed reiterated that it's going to hold rates low for some time as the economy slowly recovers, though spreads could narrow further should it decide to take more aggressive action.

I think American Capital may have what it takes to succeed in the new year, but our analysts have selected a different stock that they believe is poised for tremendous growth in 2012. Find out which company in our new free report: "The Motley Fool's Top Stock for 2012." Thousands have already requested access, and it'll be available for only a limited time. Grab it now -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Annaly Capital Management and American Capital Investment. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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