Zacks_Analysts' Blog : American Capital Reports Strong - Analyst Blog

American Capital Agency Corp. (AGNC), a real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), reported earnings of $1.39 per share during third quarter 2011, compared to $1.69 in the year-earlier quarter. Excluding one-time items, recurring net income for the reported quarter was $1.23 per share.

The company generated total revenues of $326.8 million during third quarter 2011 compared to $62.6 million in the year-ago quarter. Net interest income was $231.7 million for the reported quarter, which was below the Zacks Consensus Estimate of $259 million.

American Capital Agency recorded an annualized return on equity of 20% for the quarter. As of September 30, 2011, the company’s investment portfolio comprised $42.0 billion worth of agency securities at fair value, including $38.3 billion of fixed-rate securities, $3.2 billion of adjustable-rate securities and $0.5 billion of CMOs.

About 52% of the investment portfolio comprises less than or equal to 15-year fixed-rate securities, 37% of 30-year fixed-rate securities, 2% of 20-year fixed-rate securities, 8% adjustable-rate securities, and 1% of CMOs backed by fixed and adjustable-rate securities.

The investment portfolio of American Capital Agency was financed with $38.8 billion of repurchase agreements, $4.9 billion of equity capital and $0.1 billion of variable debt resulting in a leverage ratio of 7.9x. Adjusting for the net payable for agency securities not yet settled, the leverage ratio was 7.7x as of September 30, 2011.

American Capital Agency declared a second quarter dividend of $1.40 per share, which equates to a total of $936.7 million in dividends or $17.46 per share since its initial public offering. American Capital Agency is one of only a few companies to have increased its dividend even during the recession.

American Capital Agency’s annualized weighted average yield on average earning assets was 3.14% and its annualized average cost of funds was 1.00%, which resulted in an annualized net interest rate spread of 2.14% during the quarter – a 32-bps dip from the second quarter of 2011. As of September 30, 2011, the company's book value per share was $26.90 compared to $26.76 as of June 30, 2011. At quarter-end, American Capital Agency had cash and cash equivalents of $984.4 million.

American Capital Agency had earlier initiated a ‘Controlled Equity Offering Program’ under which it could offer from time to time up to an aggregate 15 million shares in privately negotiated and/or at-the-market transactions.  During the reported quarter, the company sold 5.1 million shares at an average price of $29.08 each for net proceeds of $147 million. At quarter-end, 1.2 million shares remained available for issuance under the program.

We maintain our ‘Neutral’ recommendation on American Capital Agency, which currently has a Zacks #3 Rank translating into a short-term ‘Hold’ rating. However, we have an ‘Underperform’ recommendation and a Zacks #5 Rank (short-term ‘Strong Sell’) for Anworth Mortgage Asset Corporation (ANH), a competitor of American Capital Agency.