There are windows of opportunity for companies that come in many forms, from making well-timed investments to raising cash. AGNC Investment (AGNC 0.97%) has been afforded an opportunity of late, as its book value has been lower than its share price. While that's good for the mortgage real estate investment trust (REIT) when it sells new shares, is it enough reason for long-term dividend investors to jump aboard?
What's it worth?
At the end of the first quarter, AGNC calculated its book value at $9.41 per share. Recently, the share price has been in the $9.75 per share space. In other words, investors seem to be affording it a premium over book value, which is an opportunity for the REIT.
Image source: Getty Images.
Book value in this case is basically the value of the company's mortgage portfolio divided by its shares outstanding. This is actually a fairly simple calculation for the company to make. From a big-picture perspective, all it does is buy mortgages that have been pooled into securities that trade like bonds, usually called something like collateralized mortgage obligations (CMOs). The value of CMOs fluctuates based on interest rates, supply and demand, and trends in the housing market. But they trade regularly, so their market values are pretty easy for management to nail down (a physical building's value would be more subjective).
When the stock price is below the book value, selling additional shares is, effectively, like giving the buyer more of the company than they are paying for. That's a bad deal for current shareholders. When the stock is above the book value, however, new shares lead to extra cash since new investors are paying a premium. That extra cash can be used to buy more investments, enhancing the returns of existing shareholders. In other words, selling shares today seems like it would be a good deal for AGNC.
A tricky business
Investors seeing the book value versus share price comparison shouldn't get too excited. The dividend yield is a huge 14.1%. That's not the type of yield a stock has if there's no risk involved in the investment. And there's plenty of history here to suggest dividend investors should tread carefully, despite the attractive opportunity to raise additional cash.
The most notable negative for investors looking to live off the income their portfolios generate is the dividend trend. Over the past decade, AGNC's dividend has headed steadily lower. And yet the dividend yield has remained high throughout the span. The problem is that dividend yield and stock price move in opposite directions, which basically means the stock price tracked the dividend lower to keep the yield high. Income investors not only suffered a reduction in income, but also a decline in principal.
Management believes it can continue to support the current dividend payment. Investors looking at the longer-term trend, however, would be reasonable to wonder if the dividend will hold over the long term, given that it hasn't over the last decade. Perhaps the REIT is at an inflection point, but conservative investors who need the income to live on should probably look for a REIT with a better track record.
Part of the problem here is that mortgage REITs are fairly complex. They are more like a fund of CMOs than anything else, with management trying to fine-tune the portfolio over time using debt (to increase returns) and hedges (to limit risk). This is very different from buying a building and leasing it out. In fact, the opportunity here between book value and share price could change easily and quickly.
Too much work
For most investors, the point of owning stocks is to be a passive investor, allowing management to do the heavy lifting so you don't have to. With a REIT like AGNC, however, you need to dig deep to make sure you fully understand the business model, what is going on in the market it serves, and its portfolio. That's a lot of work for a dividend check that's been shrinking over time. All but the most active investors will probably be better off with property-owning REITs.
