2023-09-12 08:30:00 ET
Summary
- AGNC Investment Corp. stock has moved tepidly in the past three months since my update, as it slightly underperformed the market.
- I assessed that the worst selloff in AGNC is likely over. Buyers have also returned after its July 2023 pullback, corroborating my thesis.
- The Fed is close to its peak rate hikes, supporting an upward re-rating in AGNC's portfolio. However, the recent surge in Treasury yields has dampened optimism.
- Despite that, AGNC has been consolidating constructively as investors bet on a potential Fed pivot moving ahead.
- I argue why AGNC is attractively valued and its dividend is well-covered, suggesting it isn't expected to be a value trap.
The Worst Is Likely Over For AGNC
Investors in leading mREIT AGNC Investment Corp. (AGNC) have seen AGNC slightly underperform over the past three months since my update . However, the underperformance is mitigated by its robust forward dividend yield of nearly 15%.
I gleaned that while the worst in AGNC's operating performance is likely over, investors are cautious about a substantial upward re-rating as they assessed the duration of the Fed's higher-for-longer positioning. Moreover, the recent surge in the 10Y Treasury yield likely inflicted some concerns over the market's assessment of the Fed's peak rates, as the economy has remained resilient.
Notwithstanding these headwinds, the regional banking crisis isn't expected to be much worse than we experienced in March, although further defaults cannot be ruled out. Despite that, we aren't likely to experience a significant liquidity crisis, which could intensify selling pressure on Agency MBS given their robust secondary market liquidity.
Moreover, the constructive demand/supply dynamics should help mitigate further destructive selloffs in AGNC. Fixed-income funds have propped up the demand side of the equation, while the higher interest rates have curbed supply as refinancing opportunities have been significantly curtailed.
As such, I gleaned that the market positioning of AGNC at the current levels is appropriate. In other words, I don't anticipate AGNC falling back toward its 2022 lows, although a re-test of its May 2023 levels cannot be ruled out.
Despite that, management's commentary at its second-quarter or FQ2 earnings release indicates optimism moving ahead. AGNC anticipates less interest rate volatility as the company increased its leverage to 7.5x in July. As such, it should bolster the mREIT's ability to deliver attractive risk-adjusted returns as fears are expected to subside and spreads narrow. However, near-term margin compression should be anticipated as its short-term hedges roll off. The company expects to re-position its swaps as it anticipates the Fed to pivot moving forward.
Analysts' estimates suggest further headwinds on its net dollar roll income per share through FY24. While the company outperformed estimates in Q2 as it posted a metric of $0.67, it was lower than Q1's $0.70. In addition, it's expected to lower further through Q1'24 before stabilizing. Despite that, AGNC's well-covered dividend payout ratio of 54% suggests its dividend isn't likely to face imminent threats.
Moreover, the company can leverage ATM equity offerings above its net tangible book value per share if buying sentiment on AGNC helps support it above the current levels. AGNC also remains attractively valued at the current levels, with its forward dividend yield of 15%, well above its 10Y average of 11.7%.
Is AGNC A Buy?
AGNC price chart (weekly) (TradingView)
My price action analysis suggests that AGNC faced a robust resistance zone at the $10.70 level, leading to a steep pullback from its July 2023 highs.
However, buyers have returned and helped AGNC consolidate at the current levels over the past two months. Despite that, we need a more robust buying momentum to lift AGNC toward the $10.70 level and attempt a decisive re-test to force a breakthrough.
AGNC is still well above its May 2023 lows of $8.50, indicating the market doesn't expect things to take a sharp turn for the worst. However, a lack of strong buying support at the current levels could lead to an extended consolidation period.
Investors looking to add more exposure should be prepared for near-term volatility.
Rating: Maintain Buy. Please note that a Buy rating is equivalent to a Bullish or Market Outperform rating.
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.
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For further details see:
AGNC: The High Yields Aren't Deceiving, It's Really Cheap