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American Capital Agency's 1Q14 earnings: Important takeaways

Part 2
American Capital Agency's 1Q14 earnings: Important takeaways (Part 2 of 5)

AGNC’s first increase in book value per share since early 2012

Book value per share is a critical metric for mortgage REITs

Since REITs are financials they tend to trade off of two important metrics—dividend yield and book value per share. Dividend yield is typically why investors buy REITs in the first place—they tend to have much higher dividend yields than a typical S&P 500 stock. This is due to the fact that they must distribute 90% of their earnings as dividends.

AGNC Book Value Per ShareEnlarge Graph

That said, book value per share is often thought of as a floor level for the stock. In other words, if dividends are high, it may trade at an excess of book value. However, REITs tend to trade at or just under book value. Book value, in theory, represents what a stockholder would expect to receive if the company was wound down.

American Capital Agency reports its first increase in book value per share since early 2012

Book value per share increased from $23.59 in Q413 to $24.49 last quarter. This increase was driven by an increase in shareholder’s equity from $8.67 billion to $8.81 billion and a reduction in shares outstanding from 373 million to 354.8 million. During the quarter, the company purchased 3.4 million shares of its stock at an average price of $22.10 a share, including expenses.

Book value has been under pressure are interest rates have risen

As a REIT primarily invested in 30-year fixed-rate mortgages, American Capital Agency (ANGC), along with its peer Annaly (NLY) has been reporting declining book value per share for some time as interest rates have ticked up. These REITs suffered bigger declines in book value per share than their peers like MFA Financial (MFA), Hatteras (HTS), or Capstead (CMO), which invest primarily in adjustable-rate mortgage backed securities (or ARM MBS). These mortgages have a fixed rate for the first 3, 5, or 7 years and then the interest rate floats. This means they have shorter duration, which is another way of saying they have less exposure to increasing interest rates.

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