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My High Dividend Stocks
This is my high dividend stocks site where I help site members find high dividend stocks with earning power and strong balance sheets.

AGNC reports 2Q2011 financials. Dividend in jeopardy and it is speculatively priced.

American Capital Agency Corp (AGNC) is nearly speculatively priced despite its low advertised PE ratio.  This company remains dangerously leveraged.  Higher interest rates and another credit crisis will destroy its profits.  But the yield remains huge until they cut their dividend.

Headline from a few days ago "American Capital Agency Reports $1.36 Earnings, $26.76 Book Value Per Share, Adds Two Directors"

Let's take a look at 2nd quarter financials

American Capital Agency Corp (AGNC)

Market price: $27.92

Shares: 178.51 million shares

Market Capitalization: $4.983 billion

Dividend record: 9 quarters of $1.40 dividend payments

Dividend: $1.40/share quarterly

Dividend yield: 20% ($5.60 annual dividend / $27.92 share price)

2nd quarter EPS: $1.36

Dividend payout ratio: 103% ($1.40 dividend / $1.36 EPS)  It gets harder and harder to pay that $1.40 dividend as the company continues new equity offerings to finance its leveraged finance.  AGNC will have to pay $250 million per quarter in dividends going forward (178.51 shares x $1.40 dividend).  They only earned $177.8 million this quarter.  Not good.

Earning power: $1.46 per share @ 178.51 million shares

(earnings adjusted for changes in capitalization.  There were only 15 million shares at the end of 2008.  They issue massive amount of shares to pay for their leverage.  There are over 178 million shares now)

                        EPS       Net inc.             Adj. EPS

2006                 -           -                       -

2007                 -           -                       -

2008                 $2.36    $35.4 M             $0.19   

2009                 $6.78    $118.6 M           $0.66

2010                 $7.89    $288.1 M           $1.61

----------------------------------------------------------

2011-03            $1.48    $133.5 M           $0.75

2011-06            $1.36    $177.8 M           $0.99

2011-09            ?           ?155.7 M?          ?0.87?

2011-12            ?           ?155.7 M?          ?0.87?

3 year average adjusted earnings (2008-2010) = $0.82 per share

4 year average adjusted earnings (2008-2011E*) = $1.46 per share

* I'm assuming that AGNC will earn the average of the first two quarters of 2011 which was $0.87.  This is conservative.

Based on the four year average:

Consider buying AGNC at or below $17.82 (12 times avg earnings)

Consider selling AGNC at or above $29.20 (20 times avg earnings)

AGNC is trading at 19.1 times average earnings assuming that the second half of 2011 will be the same as the first half.  This is almost speculatively priced.  Don't be fooled by the low PE ratios you see on Google Finance (3.97), Morningstar (forward PE 5.6), and Yahoo Finance (P/E ttm: 4.27)

Balance sheet: skyrocketing assets and liabilities due to ~8x leverage; equity going up

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Book value per share: $26.76 ($4776.646 M equity / 178.51 M shares)

Price to book value ratio: 0.999

Disclosure: I don't own AGNC and I don't plan on owning it.

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AGNC reports 2nd quarter earnings. Warning: Dividend payout ratio over 100%.

 American Capital Agency Corp. reported 2nd quarter earnings today.  I will provide analysis tomorrow.  The dividend payout ratio is over 100% ($1.40 dividend / $1.36 net earnings).  That isn't good news.  I wouldn't buy this over-leveraged mortgage REIT.  Here are the highlights. 

(RTTNews) - American Capital Agency Corp. (AGNC: News ) reported net income for the second-quarter of $177.8 million or $1.36 per share, compared to $36.86 million or $1.23 million in the comparable quarter last year.

Net-interest income for the second quarter rose to $200.9 million from $33.2 million a year ago, while total other loss was $6.1 million, compared to a total other income of $7.7 million in the prior year quarter.

Further, the company's board of directors declared a second quarter dividend of $1.40 per share payable on July 27, 2011, to stockholders of record as of June 23, 2011.

 
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Investors back away from leveraged RE bets

These investors are the smart ones.

Investors Back Away From Leveraged RE Bets

Jul. 11 2011 - 11:24 am | 1,214 views | 0 recommendations | 0 comments

By ETFCHANNEL.COM

Looking today at week-over-week shares outstanding changes among the universe of ETFs covered at ETF Channel, one standout is the Proshares Ultra Real Estate (URE) where we have detected an approximate $14.6 million dollar outflow — that’s a 2.7% decrease week over week (from 8,429,372 to 8,204,372). Among the largest underlying components of URE, in trading today American Campus Communities (ACC) is off about 1.3%, and American Capital Agency (AGNC) is lower by about 1%. For a complete list of holdings, visit the URE Holdings page »

The chart below shows the one year price performance of URE, versus its 200 day moving average:

Looking at the chart above, URE’s low point in its 52 week range is $35.44 per share, with $65.20 as the 52 week high point — that compares with a last trade of $62.55. Comparing the most recent share price to the 200 day moving average can also be a useful technical analysis technique — learn more about the 200 day moving average ».


Exchange traded funds (ETFs) trade just like stocks, but instead of ”shares” investors are actually buying and selling ”units”. These ”units” can be traded back and forth just like stocks, but can also be created or destroyed to accommodate investor demand. Each week we monitor the week-over-week change in shares outstanding data, to keep a lookout for those ETFs experiencing notable inflows (many new units created) or outflows (many old units destroyed). Creation of new units will mean the underlying holdings of the ETF need to be purchased, while destruction of units involves selling underlying holdings, so large flows can also impact the individual components held within ETFs.

http://blogs.forbes.com/etfchannel/2011/07/11/investors-back-away-from-leveraged-re-bets/

Disclosure: I don’t own AGNC.

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Warning: Annaly Capital Management (NLY) announces pricing of public offering of common stock.

Another day, another public offering of common stock by a leveraged REIT.  These companies including NLY, AGNC, and a few other high dividend stocks offer new shares to bring in money.  They use the money to leverage the purchase of 6x-9x more agency securities (back by the full faith and credit of the US govt – hahaha!!).  The people who run these companies are paid for the amount of equity they accumulate; shareholders do not come first.

Keynesian economics says deficits don’t matter.  They do.  The Greek government is learning this lesson the hard way.  When interest rates rise in the US for the same reasons these high yielding stocks will tank.  Until then they will pay high dividends.  Just know that there are significant risk with these stocks.

NLY has little earning power and a horrible balance sheet.

Disclosure: I don’t own NLY or AGNC.

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press release

July 11, 2011, 7:06 p.m. EDT

Annaly Capital Management Announces Pricing of Public Offering of Common Stock

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NEW YORK, Jul 11, 2011 (BUSINESS WIRE) -- Annaly Capital Management, Inc. /quotes/zigman/189739/quotes/nls/nly NLY -2.29% today announced the pricing of an underwritten public offering of 120,000,000 shares of its common stock at a price per share of $17.70 for expected gross proceeds of approximately $2.1 billion before expenses.

Annaly has also granted the underwriters a thirty-day option to purchase up to an additional 18,000,000 shares of common stock solely to cover overallotments. Annaly expects to use the proceeds of this offering to purchase mortgage-backed securities for its investment portfolio and for general corporate purposes, which may include additional investments and repayment of short-term indebtedness.

Credit Suisse Securities (USA) LLC is acting as the lead book-running manager for the offering. BofA Merrill Lynch, Morgan Stanley, UBS Investment Bank and RCap Securities, Inc. are acting as joint book-running managers.

Annaly has filed a shelf registration statement and prospectus with the Securities and Exchange Commission (SEC), and will file a prospectus supplement for the offering to which this communication relates. Before you invest, you should read the prospectus supplement and the accompanying prospectus and other documents Annaly has filed with the SEC for more complete information about Annaly and this offering. You may obtain these documents for free by visiting EDGAR on the SEC Web site at http://www.sec.gov . Alternatively, Annaly, the underwriters or any dealer participating in the offering will arrange to send you the prospectus supplement and accompanying prospectus if you request them by contacting:

Link to the original press release http://www.marketwatch.com/story/annaly-capital-management-announces-pricing-of-public-offering-of-common-stock-2011-07-11?reflink=MW_news_stmp

PIMCO enters the mortgage REIT business.

PIMCO is getting into the mortgage REIT business. 

http://www.bloomberg.com/news/2011-07-05/pimco-reit-agrees-to-slash-fee-if-residential-mortgage-fund-loses-money.html

What is its unique selling proposition?  In other words, why would I want to invest in PIMCO’s REIT instead of Annaly Capital (NLY) or American Capital Agency Corp. (AGNC)?

The trouble with these mortgage REITs is that the management is compensated for the size of their shareholder equity.  Offering additional shares is the easiest, fastest way to grow their equity through the use of 6x-8x leverage.

Avoid the mortgage REITs if you are a long term investor.  Traders can make some money before these REITs implode due to rising interest rates.

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Miscellaneous news on AGNC, TNH, and SCCO.

American Capital Agency Corp. (AGNC) news:
Title of article is "Mortgage REIT dividends look risk free this summer".  I generally agree that the MREITs are going to do well this summer.  It takes awhile for an inverted yield curve to develop and wreck their profits.  But the people who write these articles do not understand how the Federal Reserve works.  The chairman of the Federal Reserve Board, Ben Bernanke, says he's keeping a key interest rate low for an extended period of time.  That interest rate is known as the Fed Funds Rate.  It is the rate that banks charge each other for overnight loans to meet reserve balance requirements.  However, the big banks have over $1 trillion in excess reserves.  They aren't lending to each other over night because they are stuffed full of reserves.  Commercial bankers are keeping the Fed Funds rate low not Ben Bernanke.

Its a good thing they commercial bankers aren't expanding lending because if they did loan those excess reserves, then prices would more than double from what they are today.  Think $10/gallon gasoline.

http://www.marketwatch.com/story/mortgage-reit-dividends-look-risk-free-this-summer-2011-06-30?reflink=MW_news_stmp

Conclusion: Don't buy AGNC for an investment, but you can buy it for a short term trade.  In the not too distant future interest rates will rise and destroy its asset values and net income profits.

Terra Nitrogen (TNH) news:
Shares of Terra Nitrogen Company, L.P. (NYSE: TNH) fell by 6.44% or $-9.13/share to $132.75. In the past year, the shares have traded as low as $66.38 and as high as $143.50. On average, 44595 shares of TNH exchange hands on a given day and today's volume is recorded at 52049. The shares are currently trading above the 50-day moving average which indicates that the shares have been experiencing strong upward momentum as the 50 DMA is above the 200 DMA. The stock may come back down to test the 50-day moving average, so look for a move back to the $124.35 area where the stock will likely see buying pressure.

Conclusion: Buy it way down in the $90.00 range when it is on sale.

Southern Copper (SCCO) news:

Southern Copper (SCCO) Showing Bearish Technicals With 7.23% Dividend Yield

Southern Copper (NYSE:SCCO) closed Wednesday's winning trading session at $32.25. In the past year, the stock has hit a 52-week low of $25.65 and 52-week high of $50.35. Southern Copper (SCCO) stock has been showing support around $31.50 and resistance in the $33.34 range. Technical indicators for the stock are Bearish. For a hedged play on Southern Copper (SCCO), look at the Aug '11 $32.00 covered call for a net debit in the $30.65 area. That is also the break-even stock price for this trade. This covered call has a duration of 51 days, provides 4.96% downside protection and an assigned return rate of 4.40% for an annualized return rate of 31.52% (for comparison purposes only). A lower-cost hedged play for Southern Copper (SCCO) would use a longer term call option in place of the covered call stock purchase. To use this strategy look at going long the Southern Copper (SCCO) Jan '12 $25.00 call and selling the Aug '11 $32.00 call for a total debit of $6.40. The trade has a lifespan of 51 days and would provide 2.64% downside protection and an assigned return rate of 9.37% for an annualized return rate of 67.1% (for comparison purposes only). Southern Copper (SCCO) has a current annual dividend yield of 7.23%. [THA-Seven Summits Research]


Conclusion: Technical analysis means nothing without an understanding of the fundamentals of the copper commodity price.  Wait until this stock drops to $23.04 (which is 12x average earnings).  The dividend isn't safe.


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Seeking Alpha contributor sees no risk with buying AGNC. He is blind.

Seeking Alpha contributor Mike Maher wrote a positive article on American Capital Agency Corp. (AGNC) on June 23rd, 2011.  He claims that each new equity offering is an opportunity to buy AGNC because a month later the stock will have climbed higher above the old price that exisited before the drop.  Where have we heard this before?  Does the phrase “house prices always go up” ring a bell in your mind?  The two year chart of AGNC does conform to Mr. Maher’s observations, but that doesn’t mean that there is no risk of AGNC going down from its current level.  Text from Mr. Maher’s article appear indented below.

http://bit.ly/AGNC2years

Mr. Maher wrote:

Wednesday's close of trading brings a familiar press release for holders of American Capital Agency (AGNC): news of a secondary offering. The firm originally announced it was selling an additional 36 million shares, with an overallotment option for another 5.4 million shares. Later, AGNC said it had sold 43.2 million shares, raising approximately $1.2 billion. Underwriters have the right to purchase 6.48 million shares to cover overallotments. Proceeds will be used to purchase more securities and for general corporate purchases. Shares are only dropping about 2%, perhaps signaling that the market was expecting another offering.

He got this right, “These massive offerings are the only way the firm can grow rapidly…”  The executives of AGNC are compensated for the amount of equity (book value per share).   All of a sudden the massive equity offerings make sense.  Here is the applicable risk factor from the 2010 annual report.  Read it for yourself.

Our Manager’s management fee is based on the amount of our Equity and is payable regardless of our performance.

Our Manager is entitled to receive a monthly management fee from us that is based on the amount of our Equity (as defined in our management agreement), regardless of the performance of our investment portfolio. For example, we would pay our Manager a management fee for a specific period even if we experienced a net loss during the same period. The amount of the monthly management fee is equal to one twelfth of 1.25% of our Equity and therefore is only increased by increases in our Equity. Increases to our Equity would be primarily from equity offerings, which could result in a conflict of interest between our manager and our stockholders with respect to the timing and terms of our equity offerings. Our Manager’s entitlement to substantial nonperformance-based compensation may reduce its incentive to devote sufficient time and effort to seeking investments that provide attractive risk-adjusted returns for our investment portfolio. This in turn could harm our ability to make distributions to our stockholders and the market price of our common stock.

As I wrote in March, AGNC is making these offerings a habit and this is the 5th offering since last September. The previous article shows each of the earlier offerings has been an opportunity, with shares being higher a month after the news. This offering should prove to be the same. These massive offerings are the only way the firm can grow rapidly and it seems like investors should get used to them. Since shares currently trade above book value, which was last reported as $25.96 at the end of March, it makes sense to use the strong stock price to raise more money and expand the business. The fact that AGNC is able to continually tap the equity markets and still see shares run up to new highs into the dividend is a testament both to the management of the firm and to investors' interest in the massive dividend, currently at $1.40 per quarter. While it would be nice to see this dividend rising as new shares are offered and the business expands, it's hard to complain about a 19% yield without sounding greedy. Management has proven itself to be an excellent operator, so I trust in both their ability and their judgment.

AGNC’s book value will crumble when short term interest rates rise faster than long term interest rates.  I have written why interest rates will rise here:

http://www.myhighdividendstocks.com/high-dividend-stocks/why-interest-rates-will-rise-why-agnc-will-lose

The management of AGNC freely admits that higher interest rates may adversely affect their book value or their net interest income.  They use the weasel word “may” because they think their active management will be able hedge rising interest rate with swaptions and other financial devices.

Because we invest in fixed-rate securities, an increase in interest rates on our borrowings may adversely affect our book value or our net interest income.

Increases in interest rates may negatively affect the market value of our agency securities. Any fixed-rate securities we invest in generally will be more negatively affected by these increases than adjustable-rate securities. In accordance with GAAP, we are required to reduce our stockholders’ equity, or book value, by the amount of any decrease in the fair value of our agency securities that are classified as available-for-sale.  Reductions in stockholders’ equity could decrease the amounts we may borrow to purchase additional agency securities, which may restrict our ability to increase our net income.  Furthermore, if our funding costs are rising while our interest income is fixed, our net interest income will contract and could become negative.

The shares are not dropping as much as they have in the past on the news of the offering, at $28.32 after hours, down $0.50 from the close of trading Wednesday. This makes a quick trade in the name less attractive, since there will be less ground for shares to make up after the offering. Expect heavy volume Thursday, but each of the last four offerings have been opportunities to get into the name at a discount and I see no reason this offering is any different. As long as the dividend is not cut and book value continues to climb, AGNC is a buy and these offerings are opportunities.

Disclosure: I am long AGNC.

True, he sees no reason to not buy AGNC’s recent drop in price.  But I do.  If you want to really understand the risks associated with AGNC and other mortgage REITs, then read some of my past articles on AGNC:

http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

Disclosure: I do not own AGNC.  I don’t plan on owning AGNC because of its potential dividend cut, poor earning power, and weak balance sheet.

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Link to original Seeking Alpha article: http://seekingalpha.com/article/276339-another-offering-another-opportunity-in-american-capital-agency

My 2 cents on Mortgage REITs: Where Danger Lurks

This is a good article on the dangers of mortgage REIT such as AGNC and NLY.

http://seekingalpha.com/article/276613-mortgage-reits-where-danger-lurks

However, I disagree with the author on this statement, “When the economy accelerates again, which I believe could be very soon, rates are likely to rise, perhaps dramatically, even if the Fed doesn’t tighten anytime soon.”

The economy is not going to accelerate unless the commercial bankers expand lending.  Bankers are terrified of more bad loans.  If they cease being terrified and expand lending, then their 1.3 trillion dollars of excess reserves will become part of the money supply.  This will increase the M1 money supply and prices would more than double from where they are no.  See Murray Rothbard’s book “The Mystery of Banking” for more details on how the fractional reserve process works.  http://mises.org/resources/614/Mystery-of-Banking-The

I think we are years away from commercial bankers being brave enough to lend their unprecedented excess reserves that the Federal Reserve printed out of thin air.

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American Capital Agency announced an new offering for 49.69 M-I-L-L-I-O-N more shares says Dr. Evil.

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AGNC can only grow by issuing new shares.  The $1.2 billion in proceeds from its newest equity offering will be leveraged 6x-8x to add at least another $7.2 billion to its portfolio of agency securities.  Those agency securities are backed by the bankrupt US government.  Imagine that Greece was backing up Greek mortgage backed securities.  What security is that!  Well, the US is worse off than Greece when you consider the liabilities of Social Security and Medicare.  Owners of AGNC will get burned someday when the inverted yield curve returns and deficits do begin to matter.  But until then greater fools can collect a handsome dividend yield.

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American Capital Agency Announces Pricing of Public Offering of Common Stock

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BETHESDA, Md., June 22, 2011 /PRNewswire via COMTEX/ -- American Capital Agency Corp. /quotes/zigman/110324/quotes/nls/agnc AGNC -1.98% ("AGNC" or the "Company") announced today that it priced a public offering of 43,200,000 shares of common stock for total estimated gross proceeds of approximately $1.2 billion.

In connection with the offering, the Company has granted the underwriters an option for 30 days to purchase up to an additional 6,480,000 shares of common stock to cover overallotments, if any. The offering is subject to customary closing conditions and is expected to close on June 28, 2011.

AGNC expects to use the net proceeds from this offering to acquire additional agency securities as market conditions warrant and for general corporate purposes.

Citi, J.P. Morgan Securities LLC, UBS Securities LLC and Wells Fargo Securities, LLC are joint book running managers for the offering. JMP Securities LLC, Mitsubishi UFJ Securities, Nomura Securities International, Inc. and RBC Capital Markets are co-managers for the offering.

The offering will be made pursuant to AGNC's existing effective shelf registration statement, previously filed with the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement. Copies of the prospectus and prospectus supplement may be obtained, when available, from Citi, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220, telephone: (800) 831-9146; J.P. Morgan Securities LLC, c/o Broadridge Financial Solutions, 1155 Long Island Ave, Edgewood, NY 11717, telephone: (866) 803-9204; UBS Securities LLC, Attention: Prospectus Department, 299 Park Avenue, New York, New York 10171, telephone: (888) 827-7275; or Wells Fargo Securities, LLC, Attn: Equity Syndicate, 375 Park Avenue, New York, NY 10152-4077, telephone: (800) 326-5897, email: cmclientsupport@wellsfargo.com.

This press release does not constitute an offer to sell or the solicitation of an offer to buy shares of common stock, nor shall there be any sale of these securities in any jurisdiction in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such jurisdiction.

American Capital Agency plans $1B offering

Washington Business Journal - by Jeff Clabaugh

Date: Wednesday, June 22, 2011, 5:56pm EDT

Related:

Banking & Financial Services

Bethesda-based American Capital Agency Corp., which buys government-backed residential mortgage securities, is planning its largest stock offering since going public three years ago, potentially raising more than $1 billion to fund its investments.

The real estate investment trust, an affiliate of private equity firm American Capital, Ltd. (NASDAQ: ACAS), says it will sell 36 million shares of common stock in a secondary offering, and give underwriters the option to purchase an additional 5.4 million shares.

American Capital Agency stock (NASDAQ: AGNC) ended Wednesday trading at $28.85 per share.

American Capital Agency raised about $780 million from a secondary offering in March, and another $655 million in January.

The REIT’s profits more than doubled last quarter as net interest income from increased investments rose five-fold. Its investment portfolio has ballooned to $28.3 billion as of the end of the first quarter.

http://www.bizjournals.com/washington/news/2011/06/22/american-capital-agency-plans-1b.html

* * * * * * * *

(RTTNews) - American Capital Agency Corp. (AGNC: News ) announced after the close Wednesday that it plans to make a public offering of 36,000,000 shares of its common stock. The stock is now down 0.56 on 442K shares.

American Capital Agency posted gains in early trade Wednesday, but settled into a range for the bulk of the session. Shares finished up by 0.35 at $28.85. The stock rebounded off of support, following nearly a 2-week decline.

http://www.rttnews.com/ArticleView.aspx?Id=1652048&SM=1

American Capital Agency Corp. (AGNC) goes ex-dividend tomorrow.

American Capital Agency Corp (NASDAQ: AGNC) is going ex-dividend tomorrow. To receive the dividend, the stock must be owned the day prior to the ex-dividend date. The current yield is 18.6%, which is equivalent to $5.6 for the year.  Watch the price drop following the ex-dividend date.  It usually drops the equivalent of the dividend which is $1.40 per share.
 
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