Why AGNC Stock Is Down 25% in the Past Year

Mortgage real estate investment trust (mREIT) AGNC Investment Corp (AGNC 0.10%) had a tough year in 2022. Rising interest rates and waning demand for its assets crushed its share price, sending the stock down as much as 54%. As interest rates eased toward the end of the year, the stock came back with an impressive rally. Today AGNC is down about 25% in the past year.

Is now the time to buy this high-yielding dividend stock, before its next bull rally? Let's take a closer look and see.

What's going on with AGNC

AGNC invests in agency mortgage-backed securities (MBSs). These loans, which can include Federal Housing Administration (FHA) First Time Home Buyer, Fannie Mae, Freddie Mac, Veterans Assistance (VA), and other sponsored loan programs, are guaranteed by the U.S. government. That means that if a borrower defaults, AGNC isn't stuck with the bill.

These are super safe assets to own, particularly in a weakening economy in which mortgage defaults are showing signs of increasing. But rising interest rates and investor wariness of these volatile assets right now have weighed on the company's profitability.

AGNC doesn't originate loans directly. Rather, it buys and sells large numbers of loans on the secondary market, using leverage and derivative investment strategies like interest swaps and Treasury futures to earn its money. The bulk of its income comes from its net spread, which is the difference between its cost to acquire the loans and the money it makes collecting interest on them.

In such a leverage-intensive industry, even a small increase in interest rate eats into profitability. Multiple rate increases in 2022 led to lower yields and declining prices for these asset classes, which ultimately hurt AGNC's book value. As of the third quarter of 2022, AGNC's book value had fallen by 20%. The company hasn't turned a profit in four quarters, reporting a net loss of $2.01 per share in Q3 2022.

Is AGNC a buy?

The Federal Reserve has indicated that it plans to slow its interest rate increases in 2023, now that inflation is showing a positive response to past rate hikes. That's good news for AGNC. If rates ease and demand makes its way back to the MBS market, the REIT could see a higher net interest margin and an increase in book value. As of Q3 2022, its net interest margin -- which reflects the difference between the return on its investments and the cost of financing them -- was up year over year and quarter over quarter, now sitting at 2.81%. Bill Gross, known as the Bond King, recently purchased shares of the company, which many investors saw as a vote of confidence in where AGNC could be headed in the coming years.

However, there are still a lot of risks and unknowns for investors to consider. The Fed is unloading a lot of the securities -- many of them MBSs -- it purchased during the pandemic through its quantitative easing program, leading to high levels of product in the market. If this continues, and banks also unload more MBSs to reduce their risk exposure, we could see AGNC's book value fall further in 2023.

MBSs also rely on the health of the housing market, which is slowing rapidly. We're nowhere near a market correction, but prices are falling and demand is down dramatically. If the housing market deteriorates further, volatility increases for MBSs.

There's also the risk of a dividend cut. AGNC pays its dividend monthly, with its yield hovering at 11.5% at the time of this writing. A dividend this high isn't sustainable over the long run when the company operates at a net loss. Since switching to monthly dividend payments in 2014, the company has cut its payouts five times -- the equivalent of a 45% decrease. Unless things improve notably in 2023, a cut could be coming.

I personally feel AGNC's yield and potential long-term upside as the housing market and economy recover isn't worth the risk. I'd much rather invest my money in a stock that produces half of that yield, but can do so consistently over time, than invest in an ultra-high yield that likely won't be around very long. Thankfully, there are loads of high-growth, high-yielding stocks to choose from with fewer risks in today's economy.