2023-11-15 08:30:00 ET
Summary
- AGNC Investment Corp. investors have endured a challenging few months due to the significant bond market selloff and volatility.
- The bond market malaise has threatened the company's recovery thesis despite its attractive forward dividend yield.
- AGNC stock fell below its tangible net book value in October, but its recent recovery suggests buyers see tremendous value in it.
- Management's confidence in the Fed reaching the end of its rate hikes augurs well for a recovery in its book value in 2024.
- I explain why AGNC's 17% forward dividend yield is too attractive to ignore, as buyers defended its October lows robustly.
It has been a really tough couple of months for AGNC Investment Corp. ( AGNC ) investors as they suffered from the brunt of the bond market selloff amid significant volatility.
As such, my bullish thesis since I upgraded the stock in June 2023 failed to pan out as AGNC resumed its long-term downward bias. I last updated investors in September, anticipating the worst could be over. However, AGNC's October 2023 selloff nearly breached its critical $7.30 support level decisively before buyers returned in early November.
As such, the bond market malaise has threatened to scupper AGNC's recovery thesis, notwithstanding its highly attractive forward dividend yield. However, I have confidence that last week's recovery suggests buyers saw an attractively valued AGNC stock, which fell markedly below its tangible net book value in October.
The leading mREIT saw its stock last traded at a forward dividend yield of about 17.1%, well above its 10Y average of 11.7%. As such, I believe the market is still pricing in significant execution risks for AGNC, as the company saw its tangible net book value per share fall to $8.08 in Q3 , down substantially from Q2's $9.39. Therefore, the company's exposure to long-duration agency MBS assets wreaked havoc on investors' confidence again, even though it hedged its interest rate risks.
Accordingly, AGNC reported an average weighted interest rate of 5.37% on its repo (borrow short). With astute hedging strategies, AGNC delivered a combined weighted average cost of funds at 1.17%. As a result, it achieved an annualized net interest spread of 3.03%. However, the steep decline in AGNC's economic return on tangible common equity likely stunned investors, as the mREIT posted a metric of -10.1%, down significantly from Q2's 3.6%.
As such, I believe it's pretty clear for investors to understand how sensitive AGNC's profitability drivers are linked to the broad market volatility, arguably out of the company's control.
Management telegraphed its confidence that the historic tumble in the bond market could be at a significant inflection point as the Fed reaches the end of its rate hikes. Notwithstanding its hawkish pause, AGNC indicated that it's well-positioned to benefit from the reversal of the Fed's hawkish posture as it looks to hedge the longer-duration part of the curve. As such, AGNC is prepared to capitalize on the current attractive pricing in the underlying market as it anticipates the Fed cutting rates moving ahead.
AGNC price chart (weekly) (TradingView)
As seen above, AGNC fell steeply in October 2023 toward the $6.80 zone before bottoming out. It was a pivotal level for buyers to defend, as it could have resulted in worse technical selling if that level had been breached decisively.
Despite that, AGNC's long-term downtrend aligns with the long-term decline in its tangible net book value per share, which was $17.66 in 2019. Analysts' estimates suggest Q4 could be worse, as they projected a metric of $7.67, down 5.1% QoQ. However, Wall Street's 2024 expectations are in line with management's commentary , seeing a recovery in its book value per share next year.
My assessment suggests the market defended the $8 level robustly over the past two weeks, corroborating the peak Fed thesis. With AGNC still priced attractively, given the historic selloff in the bond markets, I maintain my thesis on a medium-term recovery in AGNC.
Rating: Maintain Buy.
Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.
We Want To Hear From You
Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!
For further details see:
AGNC: It's Time To Be Greedy Again