American Capital Agency
Today, let's look at three things investors should be watching regarding American Capital Agency, as they'll provide us better insight into the company.
1. Net interest margin
There's nothing more important for mortgage REITs than net interest margin levels. Mortgage REITs earn a profit on the difference of the level at which they borrow (record-low interest rates) and the rate at which they lend. Therefore, the wider this gap, the more profitable mortgage REITs will be.
Recently net interest margin rates (which are already razor-thin) have been tightening, which has put a strain on growth for American Capital and its peers -- and that's not the only worry that's plaguing the mortgage REIT sector.
Operation Twist, the Federal Reserve's program that sells short-term debt securities and buys the same amount of longer-term debt securities, was recently extended and has the potential to further shrink net interest margins, although its effect thus far has been minimal. In addition, non-agency-backed residential MBS pose a threat if the housing market takes a decidedly negative turn. Whereas Agency Capital has its interest and principal backed by the U.S. government, both Invesco Mortgage Capital
Equally important to mortgage REITs' success is their ability to prudently and successfully leverage their holdings to maximize investor returns without saddling the company with unnecessary risk.
Annaly Capital Management
As Anwar Elgonemy, author of Skin in the Game: The Past, Present, and Future of Real Estate Investments in America, mentioned in his interview in April with the Fool's Chris Hill, the mREIT sector boasts the highest debt levels of the entire REIT sector. With investors still shell-shocked from the danger of high levels of leverage, the risk of using too much leverage compounded with the inevitability that lending rates can't stay this low forever has investors closely examining exactly what type of MBS these mREITs are buying, and how easily it would be for these mREITs to exit these positions if they needed to.
3. Dividend yield
Perhaps no sector is more prone to yield-chasing than mortgage REITs. With yields regularly in the double-digits, traders are sometimes more prone to blindly throwing their money at these companies than actually spending time doing their homework -- and that would be a major no-no!
Mortgage REIT dividends are dependent on the net interest margin level and the amount of leverage an mREIT employs but can be adversely affected by a deterioration in the housing sector or a policy change from the Federal Reserve.
Many mREITs have already seen their quarterly payouts dip moderately from their peak in 2009 or 2010. American Capital's payout is down 17% from its high, Capstead Mortgage
Now that you know what to watch for, it should be easier to analyze American Capital Agency's successes and pitfalls in the future, and hopefully you'll gain a competitive investing edge.
If you're still craving even more info on American Capital Agency, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.
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Fool contributor Sean Williams has no material interest in any of the companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
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