American Capital Agency's CEO Is Buying. Should You?

Famed money manager Peter Lynch told us executives can sell their stock for any reason, but typically they buy only for one: They think the price is going to go up!

Today I'm highlighting mortgage REIT American Capital Agency (NASDAQ: AGNC  ) , which saw CEO Malon Wilkus sink more than $500,000 of his own moneyinto the company's stock the other day. Now, this wasn't an option grant, but purchases made on the open market just like you or I would do, so we should consider whether this is a sign he really thinks the REIT is ready to jump higher.

American Capital Agency snapshot

Market Cap

$11.0 billion

Revenues (TTM)

$2.1 billion

1-Year Stock Return


Return on Investment


Estimated 5-Year EPS Growth


Dividend and Yield



Malon Wilkus, CEO

Total Purchased


Average Purchase Price


Recent Price


CAPS Rating



Although following the lead of insiders can be profitable, I still recommend you do further due diligence to determine whether this stock would make a good addition to your own portfolio. So this isn't a call to buy, but just the inside track on a company you might want to check out further.

No longer a house of horrors
Relatively speaking, the housing industry does seem to be improving. Single-family home starts are at a four-year high, existing home sales rose in January to the second highest level in three years, home prices are inching up and allowing mortgage holders to get out from being underwater on their loans, and foreclosures have eased up, too. The industry's not the picture of health, but it no longer looks to be on its deathbed either.

And that's good news for the real estate investment trusts that invest in mortgages. Although they prospered initially from the housing crisis as Federal Reserve policy encouraged low-cost borrowing that allowed them to invest in higher-paying assets and pocket the difference, mREITs started sagging as the Fed tried to inject life (and money) into the system. Its quantitative easing policies artificially lowered interest rates causing prepayment of higher rate loans in exchange for lower rate ones. The narrowing spread between the two served to compress the profits the mREITs earned.

As the Fool's Amanda Alix recently pointed out, the spread between what an mREIT like Annaly Capital (NYSE: NLY  ) was able to borrow and what it could invest in narrowed to less than 1% this past quarter. While American Capital's spread was somewhat healthier at 1.63%, back in 2008, it was sporting spreads north of 3%while Annaly was above 2%.

Rolling over the markets
Fortunately, the Fed is ruminating about whether it should ease up on its quantitative easing policies. While St. Louis Fed president James Bullard says the Fed is going to be "very aggressive" with its easy money ways for a "long time," they're at least giving it serious consideration. Mortgage rates are starting to rise again, and refinancing is expected to slow, which ought to help slow the slide in the mREIT spreads. 

American Capital Agency also plans on taking advantage of various attractive opportunities as they arise, such as the TBA dollar roll market it noted on its conference call.

Getting your juices flowing
Of course, what most investors like about mREITs is their dividend. American Capital's dividend yields almost 16%, pretty much leading the industry, while Annaly's is just under 12%, similar to what Chimera Investment offers. Others like ARMOUR Residential REIT are also on the high side at 14.5%, and though Capstead Mortgage's yield is under 10%, it's still a juicy payout in comparison to other dividend paying stocks. 

Yet chasing yield is a dangerous pursuit because investors must also determine whether the dividend is sustainable. REITs that took on increasing amounts of leverage to juice their returns suddenly had to preserve capital, and some like Annaly and Chimera Investment, were forced to cut their dividends, sometimes several times.

AGNC Dividend Chart

AGNC Dividend data by YCharts.

All-American choice
Because of its historically conservative operation, Annaly has often been the preferred choice of investors, but American Capital Agency has proven itself capable of navigating the churning waters. Even with its stock moving off the lows it hit late last year as industry conditions improved, I'm inclined to agree with CEO Wilkus that there's additional room for growth in this particular mortgage REIT.

I've rated American Capital to outperform the broad indexes on Motley Fool CAPS as the CAPScall holds me accountable for my opinions here, but tell me in the comments section below if you agree this mREIT will continue riding higher. 

On the inside track
Annaly Capital Management has a history of paying huge dividends to shareholders. But there are some crucial issues investors have to understand about Annaly's business model before buying the stock. In this brand-new premium research report on the company, our analyst runs through these absolute must-know topics, as well as the future opportunities and pitfalls of the company's strategy. Click here now to claim your copy.


Read/Post Comments (4) | Recommend This Article (3)

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 25, 2013, at 11:36 AM, jh4290 wrote:

    The writer should note that he is comparing quart lay div. and monthly div. Please correct your chart.

  • Report this Comment On February 25, 2013, at 5:22 PM, crazyeconprof wrote:

    You don't buy these, 'cuz you're expecting them to go up in price'. You buy AGNC for the 16% divvy. duh! Besides, when price rises much over book value - BAM- they issue more shares and lop some of the premium off.

    P.S. mREIT's have absolutely zero to do with the health of the housing market, it is all about the financing spread.

  • Report this Comment On February 27, 2013, at 11:27 AM, jonkai3 wrote:

    heck with quarterly or monthly, to compare without the actual yield per share is absurd... but even worse, what the author should do is decide what this year's yield will be by studying which companies are actually making enough in this particular environment and make decisions on that, not what last year's yield was.

    those yields, (if the author had done it right) will look nothing like that for 2013, the market has shifted to a completely different model than 2012 was.

  • Report this Comment On February 27, 2013, at 5:02 PM, kwoksmusic wrote:

    With such a high dividend yield, and with ex-dividend date just a couple of months away, could the CEO be after just that? After all a 10-15% yield of $500K is $50k - $75k in s very short amount of time.

    But then I'm a real Fool when it comes to investing, so it's probably just some Foolish thought!

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