Should You Worry About American Capital Agency's Strategy?

One enemy of every equity investor? Dilution.

Shares of American Capital Agency (NASDAQ: AGNC  ) are down sharply today after the mREIT announced its intention to issue 50 million new shares of common stock plus up to an additional 7.5 million upon the exercise of underwriters' options. Despite the shares closing slightly above book value per share on Wednesday, shareholders did not appreciate the dilutive impact of the pending offering, as well as raising capital during a time of historically low long-term interest rates.

Playing the yo-yo
American Capital Agency primarily uses issuance proceeds to buy agency mortgage-backed securities and then engage in short-term repurchase agreements to buy additional long-term agency MBSes. Simply, the spread between the cost of its short-term repo agreements and the income from its long-term holdings generates net interest income. Today's increased selling pressure may also be attributed to the fact that the announcement comes after the company repurchased some of its outstanding common stock when shares traded slightly below book value in November.

While issuing additional common stock when shares are trading at a premium to book value is more favorable than issuing shares trading at a discount, the sell-off highlights the market's skepticism of American Capital's management team's ability to effectively allocate and position capital during the continued low-rate environment and the Federal Reserve's involvement in the agency MBS marketplace via QE3.

Jockeying for position
While American Capital has shown willingness to diversify its income streams, such as increased activity in the dollar roll market, other mREITs like Annaly Capital Management (NYSE: NLY  ) have been to positioning their portfolios for the potentially higher interest environment in the future. By scaling back its exposure to current long-term rates, in the most recent quarter, Annaly (0.95%) felt a stronger squeeze on its interest rate spread compared to American Capital (1.63%).

Today's move in the share price is not a reason for long-term mREIT investors to make impulsive decisions, but it does highlight one of the true differentiating factors of companies in this industry: Management. When investing in mREITs, in additional to betting on certain interest movements or balance sheet appreciation prospects, investors are choosing to stand with a management team who they feel will allocate their capital in the most effective way to generate long-term price and dividend appreciation. Based on today's share price reaction, the ego of American Capital's management may have taken a hit.

Like American Capital Agency, 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 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.


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  • Report this Comment On March 01, 2013, at 8:35 AM, jonkai3 wrote:

    uh, ya you should be worried, they just isssued stock at less than what their book value was...

    that is a big red flag, and they believe that their book value will be even worse after they issue their next earnings report.

    you don't do that unless you are in a bind...

    As i said before shareholders are not going to be very happy this year, the days of fake book value increases from issuing shares are gone...

    now they actually have to earn some money, and they have not been doing a good job of that from the spread. considering the dividend...

    they also would not of issued this until after they announced the dividend, but before giving it if the dividend was going to be the same...

    and for those touting "total return" by using the stock price have just had their heads handed to them, as i said they would....

    including 34 million shares that were issued at $33.70, and another about 10 million at $31 and change... ask them about an MReit price appreciation....

  • Report this Comment On March 03, 2013, at 11:15 PM, MiserblOF wrote:

    I don't believe that stock issues from mREITS are of the same kind of consequence as with most companies. It's not likely they are desperate for cash, but likely to just be seeing good buys on paper that extra funds would make possible. If theire payout ratio is less than 100%, and they otherwise are an appealing stock to own, then this sale is a potential buying opportunity. Capital appreciation in an MREIT is certainly desirable, but I don't see people buying a company that pays a 15% non-qualified dividend looking for a home run in a price run up. I don't hold AGNC but if I did, I wouldn't be concerned about this particular move.

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