2024-01-07 23:16:37 ET
Summary
- I'm buying AGNC's Series C floating rate preferreds, which currently offer an 11% yield on cost and are trading just 5 cents above their liquidation price.
- The mREIT has five outstanding floating rate preferreds that offer an alternative and safer way to gain exposure to its portfolio of residential mortgage-backed securities.
- I've stayed away from the commons which are trading at a nearly 20% premium to net book value albeit with a substantial 15% annualized dividend yield paid monthly.
AGNC Investment ( AGNC ) has five outstanding floating rate preference shares that offer an alternative and critically less risky way to gain exposure to its portfolio of residential mortgage-backed securities. I've been buying the 7.00% Series C Fixed-To-Floating Rate Preferreds ( AGNCN ). This ticker last declared a quarterly cash dividend of $0.6884 per share , an increase of 17.3% over the year-ago distribution with the preferreds still outstanding more than a year post their floating date.
These currently accrue dividends at a floating rate equal to Three-Month CME Term SOFR plus 0.26161% and a 5.111% spread per year. The floating distribution annualized means a roughly 11% dividend yield on cost that's far ahead of the other currently fixed distribution preferred series. AGNC has five outstanding floating preferred shares that offer compelling investment profiles but that are still some months or years away from floating.
The preferreds won't be able to compete with common shares purely based on dividend yield with the mREIT last declaring a quarterly cash distribution on its commons of $0.1200 per share , left unchanged from the previous month and from the year-ago period for what's currently a 15% annualized forward dividend yield. However, 2024 has kicked off with material geopolitical turbulence which could create the conditions for economic disruption and inflation to surprise to the upside. I'm playing defense with my portfolio with a higher allocation to fixed and quasi-fixed income securities.
The Floating Rate Preferreds
Preference shares are hybrid securities with features that resemble both bond and common equity. They come with a pre-determined annual dividend that has a higher priority than the common shares on AGNC's income but that ranks lower on the capital structure than actual debt. Preferreds tend to be firmly fixed but AGNC has floating clauses attached to all its outstanding preferred series.
Preferred Series | Discount/Premium to liquidation price ($25) | Annualized distribution | Yield on cost % | Floating Date |
7.00% Series C Fixed-To-Floating Rate Preferreds ( AGNCN ) | +0.2% ($25.05) | $2.7536 | 10.99% | 10/15/2022 |
6.875% Series D Fixed-to-Floating Rate Cumulative Redeemable Preferred ( AGNCM ) | -4.8% ($23.80) | $1.72 | 7.22% | 4/15/2024 |
6.50% Series E Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ( AGNCO ) | -7.16% ($23.21) | $1.63 | 7.00% | 10/15/2024 |
6.125% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ( AGNCP ) | -11.76% ($22.06) | $1.53125 | 6.94% | 4/15/2025 |
7.75% Series G Fixed-Rate Reset Cumulative Redeemable Preferred Stock ( AGNCL ) | -12.72% ($21.82) | $1.9375 | 8.88% | 10/15/2027 |
The next to float will be the 6.875% Series D preferreds ( AGNCM ). This will be at Three-Month CME Term SOFR plus 0.26161% plus a spread of 4.332% per year. These float in a few months in April, with the annual dividend rate set to jump to 9.92%. This assumes Three-Month CME Term SOFR remains at its current level of 5.33% . Whilst this dividend rate is lower than the Series C preferreds, the Series D are currently trading hands for a roughly 4.8% discount to their liquidation price at $23.80 per share. The pro forma yield on cost would be 10.4% if they're still trading at their current level when they float.
Interest Rates And Economic Volatility
Interest rates could be set for a dip this year. This would negatively impact the income of the preferreds but forms the core but acceptable risk against the wider benefits of lower interest rates on my other hybrid fixed-income tickers. For example, I own a huge position in Vornado Realty ( VNO.PR.N ) that's currently trading for 61 cents on the dollar and should recover lost ground in response to interest rate cuts as there's a negative correlation.
My sentiment towards the common shares remains mixed, unchanged from when I last covered AGNC. The mREIT has a near-term history of dividend cuts and its net book value per common share of $8.08 at the end of its recent fiscal 2023 third quarter means it's currently trading hands for a 19% premium to net book value. This has come against a consistent dip in net book value, down $1 from a year ago and a material $8.33 from two years ago.
The dividend history is unattractive, albeit with the monthly distribution stable since the pandemic. AGNC realized a $0.65 net spread and dollar roll income per common share during its third quarter, down from $0.67 in the second quarter and from $0.84 in the year-ago period. Hence, whilst the current monthly distribution of the common shares is being covered, paying a premium for net book value under pressure against the expected economic volatility of 2024 is not ideal.
The $25 per share liquidation price of the preferreds creates an inherent anchor for their stock price. They're also cumulative which means any unpaid dividend accumulates to be repaid at a later date reducing the probability of a dividend suspension. Further, they're perpetual so will continue to trade as long as AGNC remains a going concern and chooses not to fully redeem. This comes as the market as per the CME FedWatch Tool is currently pricing interest rates exiting 2024 at 3.75% to 4.00% . These probabilities will change in response to monthly economic data, Fed comments, and FOMC meetings. But the floating Series C preferreds should be paying out elevated income through most of this year even with rate cuts coming.
For further details see:
AGNC: Why I Bought The 11% Yielding Preferreds