American Capital Agency Earnings: An Early Look

Earnings season is in full swing, with many companies having already given their latest numbers to investors. The key to making smart investment decisions with stocks releasing their quarterly reports is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news.

Let's turn to American Capital Agency (NASDAQ: AGNC  ) . The mortgage REIT has been at the top of the dividend-yield charts for years, but competition for mortgage-backed securities from the Federal Reserve has pulled payouts down and cast doubts on the viability of the industry going forward. Let's take an early look at what's been happening with American Capital Agency over the past quarter and what we're likely to see in its quarterly report on Thursday.

Stats on American Capital Agency

Analyst EPS Estimate

$1.06

Change From Year-Ago EPS

7%

Revenue Estimate

$382 million

Change From Year-Ago Revenue

45%

Source: S&P Capital IQ.

Will American Capital Agency keep on paying off investors?
Trying to come up with estimates for American Capital Agency is always difficult, as so many variables go toward producing bottom-line earnings for mortgage REITs. With elements like derivative exposure and sales of assets having an impact on total revenue figures, net interest income is arguably a better measure of overall success, and it appears likely to climb as well. Yet even after factoring in a dividend payment, American Capital Agency has produced only flat returns since early November.

For years, low interest rates bolstered prospects for American Capital Agency and its mortgage REIT peers. By borrowing cheaply and investing in higher-yielding mortgage-backed securities, American Capital Agency was able to generate and sustain double-digit dividend yields, taking advantage of REIT status to avoid corporate-level taxation on its profits.

Now, though, the mortgage REIT space has gotten extremely crowded. American Capital Agency and rival Annaly Capital (NYSE: NLY  ) dwarf the other players in the industry, but ARMOUR Residential (NYSE: ARR  ) and CYS Investments (NYSE: CYS  ) are among many small companies that have been fighting over a dwindling supply of potential investment securities. Moreover, since the Federal Reserve has bought nearly $1 trillion in mortgage-backed securities as part of its QE3 strategy, American Capital Agency and its peers have had even fewer securities to buy. That's one reason why Annaly is buying Crexus Investment (UNKNOWN: CXS.DL.DL  ) , but it also has contributed to the trend toward lower dividends among mortgage REIT players.

In American Capital Agency's report, be on the lookout for further news about future strategic plans, including investment policy and potential acquisitions. As it gets harder for the REIT to obtain the securities it needs, American Capital Agency could have no choice but to retrench and prepare for potentially higher interest rates in the future.

Can American Capital Agency beat Annaly?
The mortgage REIT industry is going through a lot of changes, and Annaly is at the forefront of them with its buyout of Crexus. What's in store for Annaly going forward? Read our premium research report and find out whether Annaly's best days are behind it. Our analyst walks you through Annaly's future opportunities and the pitfalls of its strategy. Click here now to claim your copy.

Click here to add American Capital Agency to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.


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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 05, 2013, at 4:10 PM, HectorSector wrote:

    When sanity returns to the financial councils in Washington, the Federal Reserve will disgorge its mortgage holdings and stop buying new ones. Meanwhile, it's still worthwhile holding mREITs whose book value rises as the Fed pursues its demented course.

  • Report this Comment On February 06, 2013, at 10:41 AM, woo131 wrote:

    I can't say this article has presented any information. Do you feel a basic need to blather?

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