AGNC Investment: Very Risky 12.6% Yield (NASDAQ:AGNC)
AGNC Investment Corp. (NASDAQ:AGNC) has a record of slicing dividends, and a new spherical of e book benefit losses and declining profits could pressure the mortgage trust to reduce its dividend still again.
AGNC Expense at present trades at a 12.6% produce, indicating that buyers are starting to be much more involved about the probability of yet another dividend lower.
Provided AGNC Investment’s substantial ebook value decline in the initially quarter and mounting challenges to leveraged rely on funding expenditures, investors must count on AGNC to trade at a decrease valuation (P/B-multiple) in the long run.
The Central Lender Is Relocating Aggressively On The Desire Fee Entrance
Inflation has turn into a serious problem not only for buyers, but also for companies, which are influenced by inflation/fascination costs in two techniques: they are pressured to deal with larger borrowing expenses, implying reduced margins, and better interest amount charges make personal debt-driven business products, this sort of as AGNC Investment’s, far more costly.
In Could, inflation rose at an once-a-year fee of 8.6%, prompting the central lender to eventually react by increasing benchmark curiosity premiums by .75 proportion factors in June. It was the biggest maximize in fascination costs in 28 decades.
Because inflation continues to be totally out of handle, the central bank is very likely to keep on aggressively increasing curiosity premiums in 2022. Two weeks ago, Federal Reserve Chair Jerome Powell expressed support for an additional .75 proportion-position boost in benchmark interest costs in July, which would counteract inflation on the a single hand although making personal debt servicing extra highly-priced for firms that count on it on the other.
House loan trusts these kinds of as AGNC Investment depend on financial debt, irrespective of the point that the house loan have confidence in has already lessened its leverage from 9.4x on March 31, 2020, to 7.5x on March 31, 2022. AGNC Investment’s leverage ratio remains large.
Guide Worth Losses And A number of
Increased curiosity fees will make AGNC Investment’s small business extra high-priced, in particular specified the trust’s reliance on debt to get home finance loan belongings.
AGNC Investment has benefited tremendously from the central bank’s unfastened monetary plan through the Covid-19 pandemic, but borrowing costs commenced to increase in 1Q-22 and will continue on to increase, implying a decrease net interest distribute for the mortgage belief in the long term.
The average charge of funds for the believe in should really increase more in the next quarter. If funding fees proceed to increase, AGNC Expense may possibly be compelled to reduce its payout the moment extra.
AGNC Financial investment has cut its dividend additional than when in advance of.
Regrettably, major changes in the central bank’s interest rate policy throughout the initially quarter resulted in a important book benefit reduction for AGNC Expense.
The home loan rely on had to report a 16% QoQ decrease in reserve price, ending the quarter with a ebook value of only $14.12 for each share. AGNC Investments’ ebook price has lowered by 25% considering that March 31, 2021.
It can be fairly devastating for a mortgage have confidence in to reduce 25% of its reserve benefit in a yr, and it should convince dividend traders that neither AGNC Investment’s guide benefit nor dividend are sustainable.
Presented the hazards of better funding expenses and lessen internet interest spreads in the future, as very well as AGNC Investment’s destructive book worth pattern in excess of the final calendar year, the believe in need to trade at a significantly greater e-book benefit low cost than the 21% we currently see. AGNC Investment’s e-book benefit is probable to tumble once more in 2Q-22, implying that the efficient book worth lower price is significantly less than 20%.
Why AGNC Could See A Increased Valuation
Larger desire premiums are a drag on the corporate sector in general, but house loan trusts in specific mainly because they count so heavily on cheap personal debt to obtain home loan belongings and gain from the unfold involving borrowing fees and investment decision yields.
If the central financial institution abruptly made a decision to prevent increasing desire charges, maybe to stop the overall economy from coming into a economic downturn, mortgage loan trusts could see renewed trader curiosity and decreased e book benefit special discounts.
Home finance loan trusts are in peril ideal now. Desire rates are predicted to rise further in 2022, requiring property finance loan trusts like AGNC Expenditure to take in a significant raise in funding costs, which will eat into revenue. Mainly because the central financial institution is envisioned to raise fascination premiums even further, AGNC Investment’s web fascination spread may perhaps deal, necessitating an additional dividend cut.
These charge hikes are a problem for trusts like AGNC Financial commitment, which has been a serial dividend cutter, and could lead to even more substantial guide benefit losses in the coming quarters.
I do not think AGNC Investment’s dividend is notably protected listed here, and traders need to get ready for but a further dividend lower in 2022.