AGNC Investment Corp.’s AGNC shares have risen 13% year to date against the industry’s decline of 0.2%. The stock is trading above its peer Two Harbors Investment Corp. TWO. However, Annaly Capital Management NLY has fared better than it.
Price Performance
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AGNC is a publicly traded mortgage real estate investment trust (mREIT) that offers favorable long-term stockholder returns with a huge dividend yield. This may tempt many investors to buy the stock now. Let’s evaluate various factors at play to decipher whether AGNC stock is worth including in one’s portfolio.
Lower Rates to Support AGNC Investment
AGNC’s financials have been adversely impacted since early 2022, when the Federal Reserve began its interest rate hiking cycle. The negative return and falling profitability raised concerns about the company’s capacity to sustain its high-yielding payment.
Higher rates led to a surge in AGNC's borrowing costs, which resulted in a net interest loss during the nine months that ended Sept. 30, 2024. Due to spread risk, high rates also affected the book value of the company's investments. From Sept. 30, 2022, to Sept. 30, 2024, the company’s book value per share declined 5.9%.
Nonetheless, the Fed has lowered the interest rates twice since September 2024, with the fund rates now in the 4.5-4.75% range. As the central bank lowered the rates, long-term bond yields declined, resulting in a fall in mortgage rates. Per a Freddie Mac report, the average rate on a 30-year fixed-rate mortgage dropped to the lowest level in over a month to 6.69% as of Dec. 5, 2024, from 6.81% in the previous week.
Market participants expect one more 25 basis point rate cut next week, and more in 2025. This should help boost AGNC's net interest spread and the book value of its portfolio.
AGNC’s Favorable Long-Term Prospects
AGNC Investment primarily focuses on leveraged investments in Agency residential mortgage-backed securities, including residential mortgage pass-through securities and collateralized mortgage obligations. A U.S. government agency or a U.S. government-sponsored enterprise guarantees such investments' principal and interest payments.
As a levered and hedged investor in Agency MBS, AGNC's return opportunities are most favorable when Agency MBS spreads to benchmark rates are wide and stable and interest rates and monetary policy are less volatile.
The long-term outlook for Agency MBS remains favorable. Agency MBS spreads have remained in a range that supports positive long-term risk-adjusted returns for leveraged investors like AGNC. At these levels, Agency MBS provides a significant incremental yield over U.S. Treasuries and investment-grade corporate paper, driving demand for Agency MBS. Given the positive supply-demand dynamic for Agency MBS and the improved monetary policy outlook, present returns and prospects for AGNC Investment look favorable.
AGNC’s Dividend Track Record
AGNC has a record of paying monthly dividends. Its current dividend yield is 14.8%, which is impressive compared with the industry average of 10.1%. The company currently has a payout ratio of 67%.
AGNC is not the only dividend-paying stock among Zacks Industry — REIT and Equity Trust. Companies like TWO and NLY also offer solid dividend options.
NLY has an annual dividend yield of 13.1%, while TWO has 15.2%.
While the ultra-high dividend yield and regular payout appear attractive to investors seeking high-income funds, the company has a track record of lowering dividends during stressful times. The company has not increased its dividend in the past five years.
Dividends aside, AGNC has a share repurchase plan in place. In October 2024, the company’s board of directors terminated the existing stock repurchase plan (which had $1 billion in remaining capacity and was set to expire on Dec. 31, 2024) and replaced it with a new plan authorizing it to repurchase up to $1 billion of common stock through Dec. 31, 2026.
The company plans to buy back shares only when the repurchase price is lower than the then-current estimate of tangible net book value per common share.
Is AGNC Stock Worth Including in One’s Portfolio?
The Fed's adjustment in monetary policy is expected to boost AGNC’s net interest spread and the book value of its portfolio over the long run. However, in the near term, its earnings are expected to remain under pressure as hedges roll off.
Earnings Estimates
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Find the latest EPS estimates and surprises on Zacks Earnings Calendar.
Further, any volatility in the mortgage market, unfavorable changes in the shape of the yield curve and deterioration of the generic financial conditions might affect AGNC's performance.
The stock is currently trading below its 50-day moving average, reflecting bearish analyst sentiment.
50-Day Moving Average
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From a valuation standpoint, AGNC Investment appears expensive relative to the industry. The company is currently trading at a premium with a forward 12-month price-to-tangible book (P/TB) multiple of 1.05X, above the industry average of 0.93X.
Price-to-Tangible Book
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Considering the pros and cons of AGNC, we may conclude that investors should refrain from rushing to buy AGNC right now. Instead of just banking on its lucrative dividend yield, they should keep an eye on the upcoming interest rate changes and the mortgage market before making any decision. Its premium valuation also warrants caution.
AGNC Investment currently carries a Zacks Rank #4 (Sell).
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
