AGNC Investment (AGNC +1.26%) is trading a bit below $10 per share today and it offers an ultra-high 14%+ dividend yield. Think about that for a second -- you spend $10 (or less), a nice round number, and you get roughly $1.45 a year in dividends. That sounds like a great trade, but there's another number you need to consider here when it comes to the company's value: $8.41.
What is AGNC Investment worth?
From a theoretical perspective, AGNC Investment is worth whatever an investor is willing to pay for it. Right now that appears to be just a bit less than $10 a share. But this is not your typical company. It is a mortgage real estate investment trust (REIT). Basically, AGNC Investment owns a portfolio of mortgages that have been pooled together into bond-like securities.
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From a business perspective, the value of AGNC Investment is really the value of the securities it owns. The company actually provides that value at the end of every quarter, calling it tangible net book value per common share. At the end of 2024 the company reported this figure to be $8.41, down $0.41 from the third quarter of that year.
If that's what AGNC Investment is worth, according to the company, why would anyone want to pay more than that? The huge dividend yield could do it, for investors who focus more on yield than the business backing the yield. Investors who foresee positive outcomes for mortgages might also be willing to pay up. But the difference here is massive and it has material implications.
AGNC Investment explains the problem clearly
During AGNC Investment's fourth-quarter 2024 earnings call, COO Peter Federico was asked about the company's stock issuance during the quarter. He took the time to explain the timing issues of the transactions. There were periods in 2024 when stock sales were used to raise capital that was instantly employed, but in the fourth quarter stock was sold and the proceeds weren't deployed until later. He described this as being opportunistic.
NASDAQ: AGNC
Key Data Points
But the key statement was this: "Obviously, we look at the accretion benefit and book value benefit. If you look back over the course of the year, it was -- all of our capital raises really were significant contributors to book value for our existing shareholders." What he's saying is that selling the stock when it is priced above book value helps create value for existing shareholders. This is because the cash raised above book value can be used to buy additional mortgage securities as if the company was given free money.
This benefit does not accrue to the person buying the newly issued stock. It is a transfer of wealth from the person buying the new stock to existing AGNC Investment shareholders. The REIT isn't hiding this fact at all and is actually highlighting it as a positive. Only that positive is a negative if you are the one buying the shares above book value.
The number to watch isn't $10, it is book value
If you are thinking about buying AGNC Investment and are attracted to it because of the sub-$10 stock price, stop. That isn't the important number. The big number is book value and, as of the end of 2024, the figure to watch was $8.41 per share. If you pay more than that number you are giving a cash gift to AGNC Investment's current shareholders. Maybe the huge yield is enough of an incentive to justify that for you. But don't buy the stock without at least considering the implications of paying more than book value.
