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American Capital (AGNC) Misses on Q1 Earnings, Down Y/Y

American Capital Agency Corp. AGNC reported first-quarter 2016 net spread and dollar roll income of 52 cents per share (excluding estimated "catch-up" premium amortization benefit) that missed the Zacks Consensus Estimate of 57 cents. The reported figure also came lower than 54 cents earned in the prior quarter.

First-quarter 2016 comprehensive income per common share was 1 cent as against comprehensive income per share of 6 cents recorded in the prior quarter.

The economic return on equity for the company during the quarter was a positive 0.4%. This reflected dividend per share of 60 cents and a 50 cents decline in net book value per share.
 
The company’s annualized economic income on common equity was 1.8% as against economic income of 3.3% in the prior quarter. Moreover, as of Mar 31, 2016, the company’s net book value per share was $22.09, down from $22.59 as of Dec 31, 2015.

Notably, net interest income (“NII”) of $196 million missed the Zacks Consensus Estimate of $273.1 million and also came in lower than the prior-quarter figure of $288 million.

Inside the Headlines

As of Mar 31, 2016, the company’s investment portfolio aggregated $62.1 billion of agency MBS, to-be-announced (TBA) securities and AAA non-agency MBS. This included $6 billion of TBA mortgage position and $0.1 billion of AAA non-agency MBS.

Inclusive of its net TBA position, American Capital Agency’s "at risk" leverage ratio was 7.3x as of Mar 31, 2016, up from prior-quarter figure of 6.8x. For the first quarter, the company’s investment portfolio bore a weighted-average constant repayment rate of 8.8% compared with 9.5% in the prior quarter.

Average asset yield on its "balance sheet funded assets" (investment portfolio exclusive of net TBA position) was 2.32% for the fourth quarter, down from 2.87% in the prior quarter. Moreover, combined annualized net interest rate spread on the company’s balance sheet and dollar roll funded assets for the quarter was 0.94% compared with 1.47% in the prior quarter.

Also, as of Mar 31, 2016, American Capital Agency’s cash and cash equivalents totaled around $1.1 billion, almost unchanged sequentially.

Dividend Update and Stock Repurchase

In first-quarter 2016, American Capital Agency declared monthly dividends of 20 cents per share for January, February and March. Notably, the company has disbursed a total of $6.2 billion in common dividends or $33.30 per common share, since its initial public offering in May 2008.

Furthermore, during the quarter, the company repurchased around 6.5 million shares of its common stock (1.9% of its outstanding shares as of Dec 31, 2015) at an average price of $17.89 per share, including expenses, for a total of around $116 million.

Importantly, the company has bought back 68.1 million shares of its common stock for around $1.4 billion, including expenses, since the commencement of the stock buyback program in fourth-quarter 2012. As of Mar 31, 2016, the company had $0.6 billion available under its current repurchase authorization through Dec 31, 2016.

Conclusion

We expect American Capital Agency to remain range-bound in the near term, given the current market volatility. Further, the decline in book value is discouraging. However, the company’s concerted measures to reposition its portfolio for meeting the current rate environment are expected to help it sail through the difficult times.

American Capital Agency currently has a Zacks Rank #4 (Sell). The company is externally managed and advised by American Capital AGNC Management, LLC, an affiliate of American Capital, Ltd. ACAS. The latter carries a Zacks Rank #3 (Hold).

Investors interested in the mREIT industry may consider stocks like Annaly Capital Management, Inc. NLY and Colony Capital, Inc. CLNY. Both stocks carry a Zacks Rank #2 (Buy).

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