American Capital Agency Corp. Earnings: What's Next for Mortgage REITs?

The mortgage REIT's earnings and revenue are expected to decline, but have shareholders already built that into the share price?

Jan 30, 2014 at 11:05PM

American Capital Agency (NASDAQ:AGNC) will release its quarterly report on Monday, and investors have already sent shares of the mortgage REIT tumbling during the past several months, as fears about the Federal Reserve's tapering of its quantitative easing program have spread across the mortgage-backed securities market. Yet, even as it and peers Annaly Capital (NYSE:NLY) and Two Harbors (NYSE:TWO) have cut their dividends in recent quarters, American Capital Agency earnings could eventually stabilize, and even grow again if short-term rates stay flat, or rise less rapidly than long-term rates during the next couple of years.

American Capital Agency has been one of the favorite investments for dividend lovers in recent years, with its double-digit dividend payouts enticing income-hungry investors to seek to profit from the highly leveraged play on mortgage-backed securities. Yet, American Capital Agency has seen its share price suffer from losses in its securities portfolio, with falling prices for bonds having a definite impact on American Capital Agency's book value. Let's take an early look at what's been happening with American Capital Agency during the past quarter, and what we're likely to see in its report.

Agnc Fed
Will the Federal Reserve hurt American Capital Agency's earnings in 2014? Image source: Motley Fool.

Stats on American Capital Agency

Analyst EPS Estimate


Change From Year-Ago EPS


Revenue Estimate

$369.02 million

Change From Year-Ago Revenue


Earnings Beats in Past 4 Quarters


Source: S&P Capital IQ.

How much will American Capital Agency earnings fall this quarter?
In recent months, analysts have gotten a lot less enthusiastic about American Capital Agency earnings, cutting their fourth-quarter estimates by about a third. The stock has also delivered poor performance, falling 14% since late October.

The vast bulk of American Capital Agency's share-price decline came after its third-quarter report, in which the mortgage REIT reported several troubling results. Net interest spreads dropped from 1.49 percentage points to 1.20 percentage points, and returns on equity from interest income fell again to just 10.31%.

In order to try to protect itself from rising rates, American Capital Agency moved aggressively from 30-year fixed mortgages to 15-year fixed mortgages in the third quarter. Yet, given that 15-year mortgages earn almost a full percentage point less than 30-year mortgages, the move could further pressure American Capital Agency's interest income if the mortgage REIT didn't reverse course in the fourth quarter. That's what's largely responsible for the company choosing to cut its dividend again last month, making its quarterly payout $0.65 per share.

Yet a big question mark for American Capital Agency is what the Fed decides to do in 2014. So far, tapering has taken away $20 billion in monthly bond purchases, including $10 billion in mortgage-backed securities. Since the taper began, however, interest rates haven't risen. That has taken away much of the pressure that sank book values at American Capital Agency, Annaly, and ARMOUR Residential (NYSE:ARR) by double-digit percentages during the second quarter of 2013, when tapering first made it onto the table.

Still, many argue that American Capital Agency's share-price declines already reflect the impact of the taper. Indeed, the mortgage REIT itself has said that it has bought back about 7% of its outstanding shares in the past quarter, spending $586 million during the fourth quarter, and paying an average share price of $20.82 -- just a bit higher than its closing price on Thursday.

In the American Capital Agency earnings report, watch for a couple of key figures: what the mortgage REIT has done to the alignment of its portfolio, and how it has changed its leverage ratio. With potential opportunities to pick up cheaper mortgage-backed securities as the Fed tapers, while perhaps being able to maintain low borrowing costs if short-term rates stay low, American Capital Agency could be setting itself up for a big rebound later in 2014.

Why people love mortgage REITs so much
The reason so many people love American Capital Agency is its double-digit dividend yield. But in choosing the best dividend-paying investments, it's smarter to identify which dividend stocks, in particular, are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

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.

Dan Caplinger owns shares of Two Harbors Investment. You can follow him on Twitter @DanCaplinger. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers