My High Dividend Stocks Blog

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's liabilities are real and their book value must be questioned.

I wonder what Wunderlich Securities analysts are smoking?  These people are obviously devotees to Keynesian economics.  They believe that printing money to buy US Treasuries or agency MBS will only make the economic crisis worse later and destroy AGNC’s profitability.  The Federal Reserve is attempting to paper over the problem they created.  AGNC’s liabilities are real, but their asset values must be questioned.  The book value of AGNC is bogus.  I wrote about this recently:

http://bit.ly/EconFools

Anyone who assumes that AGNC’s book value as stated in their financial reports is trustworthy will be sorely mistaken when the next financial crisis hits.  The loss of book value can be caused by several factors.  They will happen.  It is just a matter of time.  The laws of economics assure it.

The structural problem in the world financial system remain unfixed.  Keynesian central bankers are inflating wildly forestall the day of reckoning.  The next financial crisis will destroy MBS REITs profitability and book values.  Enjoy the high dividend yields while they last.

So be warned that there is trouble on the horizon for the MBS high dividend stocks and plan your exit accordingly.  Annaly Capital Management (NLY) has decreased its dividend during the last two quarters.  I expect AGNC to do the same.

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Wunderlich Securities has a research report on housing finance and mortgage REITs. In the note, Wunderlich mentions American Capital Agency Corp. (NASDAQ: AGNC).”

In a note to clients, Wunderlich writes, "Market concerns over the pending termination of QE2 pressured the mortgage REITs. Though we believe the homeowner lacks the financial flexibility to carry the economy out of the ongoing sluggish economy, we do expect that interest rates could tend to rise through May and the end of this round of easing. At the same time, we believe that easing will continue, though perhaps in different forms. For example, a policy to keep mortgage rates low could be executed through purchases of agency MBS, which could sustain liquidity in the housing finance secondary market. Higher benchmark rates could put pressure on book value and tighten spreads, but we believe that relatively high dividends in our coverage universe will be sustainable. With dividends providing price support, we expect the group to stage a slow recovery to an average 15% premium to trailing book value."”

Shares of AGNC lost 17 cents on Friday to close at $28.53, a loss of 0.6%.

Read more: http://www.benzinga.com/analyst-ratings/analyst-color/11/04/1010248/wunderlich-securities-discusses-housing-finance-and-mort#ixzz1JtQ8Nw1C

Foolish recommendations for AGNC from economic fools

Here is another glowing article from The Motley Fool CAPS community about AGNC:
http://www.fool.com/investing/general/2011/04/15/4-star-stocks-poised-to-pop-...

These people do not understand economics. The author discounts the risk that interest rates will rise enough in the next few months which would hurt AGNC's profitability. The Federal Reserve is scheduled to end it's quantitative easing 2 (QE2) buying of US treasuries this summer. Interest rates are already rising despite the Fed's efforts. They will go even higher when the Fed ceases to inflate. The Fed has been buying around 80% of the US bonds auctioned since QE2 started. The US government will continue to spend more than $1.6 trillion dollars than they extort in taxes. This is bad for AGNC because risk of US government default increases and the guarantees of agency securities will be an easy target of congress to cut.

QE 2 is Fed chairman Bernanke's panicked reaction to the threat of a double dip recession. It is inflating like crazy right now. Once QE 2 is over If the Fed ceases to inflate for more than a year like it did in 2010, then a new financial crisis will emerge bigger than the crisis of 2008. Banks will possibly cut off AGNC from cheap short term borrowings (repurchase agreements) or cease lending to the altogether. This would destroy their profitability very quickly. Also their agency securities would lose value which would compound AGNC's problems. Interest rates go higher than they are now in that situation also.

The party is almost over for all the high dividend mortgage REITs. Their fates are in the hands of the commercial bankers, the Federal Reserve, and the US Congress. I wouldn't want my high dividend stock portfolio exposed to those assclowns.

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The practical significance of book value. Plus 15 book values of stocks mention on this blog.

There is no hard fast rule for price to book value ratios, but lower is definitely better.  I like the ratio too be less than 2.0.  Here is a list of many of the high dividend stocks mentioned on this blog with their most recent price, book value (BV)/share, Price/BV ratio, and dividend yield.  The results might surprise you.  Most of the book values per share are as of December 21st, 2010 unless otherwise noted.

Ticker              Price                BV/share         P/BV   Div. yield

=================================================

AGNC            $28.58             $24.24             1.18     19.51%

SB                   $8.26               $3.86               2.14     6.79%

SDRL              $34.42             $9.78               3.52     5.6%

TNH                $108.96           $11.35             9.6       4.94%

EXC                $39.97             $20.45             1.95     5.13%

FE                   $37.90             $28.02             1.35     5.99%

FRO                $22.59             $9.57               2.36     1.62%

MCD               $76.66             $13.55             5.66     3.27%

NGG               $48.80             $12.87 (ttm)    3.79     4.28%

PM                  $65.90             $1.90               34.68   4.01%

PCL                 $42.13             $8.47               4.97     3.96%

TNK                $10.15             $10.46             0.97     9.02%

VOD               $28.85             $17.06 (ttm)    1.69     3.18%

WIN                $12.41             $1.77               7.01     7.73%

T                      $30.27             $18.80             1.61     6.11%

Excelon (EXC), First Energy (FE), Teekay Tankers (TNK), and AT&T (T) warrant further examination for their high dividend yields and low price/book value ratios.

Philip Morris (PM) has an extremely high price/book value ratio which needs to be examined to make sure it’s not some weird artifact of how Google Finance and Morningstar display financial information.

Here is quick excerpt for Chapter 42 of Security Analysis 2nd edition on the practical significance of book value.

* * * * * * *

Practical Significance of Book Value. The book value of a common stock was originally the most important element in its financial exhibit. It was supposed to show “the value” of the shares in the same way as a merchant’s balance sheet shows him the value of his business. This idea has almost completely disappeared from the financial horizon. The value of a company’s assets as carried in its balance sheet has lost practically all its significance. This change arose from the fact, first, that the value of the fixed assets, as stated, frequently bore no relationship to the actual cost and, secondly, that in an even larger proportion of cases these values bore no relationship to the figure at which they would be sold or the figure which would be justified by the earnings. The practice of inflating the book value of the fixed property is giving way to the opposite artifice of cutting it down to nothing in order to avoid depreciation charges, but both have the same consequence of depriving the book-value figures of any real significance. It is a bit strange, like a quaint survival from the past, that the leading statistical services still maintain the old procedure of calculating the book value per share of common stock from many, perhaps most, balance sheets that they publish.

* * * * * * *

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A tale of two book values (AGNC and SB).

I have been concentrating on analyzing dividend records and determining the earning power of various high dividend stocks since August 2010.  But there is another major component of high dividend stock analysis: balance sheet analysis.  Today I will start a series of blog posts covering balance sheet analysis.  I will focus my efforts mostly upon American Capital Agency Corp (AGNC) and Safe Bulkers (SB).

Today I will start examining the book values of AGNC and SB.  It takes some digging in the annual reports to get accurate numbers.

AGNC book value as of December 31st, 2010 is $24.24 per share:

            Tangible assets: $14,476 M (mostly agency securities)

            Intangible assets: none

            Preferred stock: none

            Bonds: none

Minus  Total liabilities: $12,904 M (mostly repurchase agreements)

Equals shareholder equity: $1,572 M

Book value = equity / number of shares = $1,572 M / 64.856 M = a book value of $24.24 per share.

The question for AGNC becomes – How were the prices of the agency securities determined?  Mortgage backed securities are not exactly known for their price transparency.  They are somewhat toxic.  That is why the big banks off loaded them to the Federal Reserve during the financial panic of 2008-2009 and received US treasury bonds in return.  The guarantees from Fannie and Freddie will be revoked in the future due to massive US budget deficits.  I don’t trust the stability of the agency securities prices for three reasons and I will use their own words from their risk factors against them:

1) a continued depression in the housing/mortgage market hurts the value of AGNC’s agency securities.

Continued adverse developments in the broader residential mortgage market may adversely affect the value of the agency securities in which we invest.

Since 2008, the residential mortgage market in the United States has experienced a variety of unprecedented difficulties and changed economic conditions, including defaults, credit losses and liquidity concerns. Many of these conditions are expected to continue in 2011 and beyond. Certain commercial banks, investment banks and insurance companies announced extensive losses from exposure to the residential mortgage market. These losses reduced financial industry capital, leading to reduced liquidity for some institutions. These factors have impacted investor perception of the risk associated with real estate related assets, including agency securities and other high-quality residential mortgage-backed securities (“RMBS”) assets. As a result, values for RMBS assets, including some agency securities and other AAA-rated RMBS assets, have experienced a certain amount of volatility. Further increased volatility and deterioration in the broader residential mortgage and RMBS markets may adversely affect the performance and market value of our agency securities.

We invest exclusively in agency securities (other than for hedging purposes) and rely on our agency securities as collateral for our financings. Any decline in their value, or perceived market uncertainty about their value, would likely make it difficult for us to obtain financing on favorable terms or at all, or maintain our compliance with terms of any financing arrangements already in place. Substantially all of the agency securities we invest in are classified for accounting purposes as available-for-sale. All assets classified as available-for-sale are reported at fair value with unrealized gains and losses excluded from earnings and reported as a separate component of stockholders’ equity. Agency securities that we invest in that are classified as trading securities are reported at fair value, with unrealized gains and losses included in current income. As a result, a decline in fair values may reduce the book value of our assets. Moreover, if the decline in fair value of an available-for-sale security is other-than-temporarily impaired, such decline will reduce earnings. If market conditions result in a decline in the fair value of our agency securities, our financial position and results of operations could be adversely affected.

2) If the Federal Reserve sells enough agency securities, then that will hurt the value of AGNC’s securities (not likely anytime soon)

Federal Reserve programs to purchase securities could have an adverse impact on the agency securities in which we invest.

Beginning in November 2008, the Federal Reserve initiated a program to purchase direct obligations of Fannie Mae, Freddie Mac and the Federal Home Loan Bank and agency securities backed by Fannie Mae, Freddie Mac and Ginnie Mae. In total, this program resulted in the Federal Reserve purchasing $300 billion of direct obligations and $1.75 trillion of agency securities with the purchase program ending in the first quarter of 2010. One of the effects of this program has been to increase competition for available direct obligations and agency securities, with the result being an increase in pricing of such securities. The Federal Reserve may hold the direct obligations and agency mortgage securities to maturity or may sell them on the open market. Sales by the Federal Reserve of the direct obligations or agency mortgage securities that it currently holds may reduce the market price of such securities. Reductions in the market price of agency mortgage securities may negatively impact our book value.

In addition, the Federal Reserve initiated a program in November 2010 to purchase up to $600 billion of long-term U.S. Treasury securities by mid-2011 as part of its continuing effort to help stimulate the economy by reducing mortgage and interest rates. Such action could negatively affect our income or our net book value by impacting interest rate levels and the spread between mortgage rates and other interest rates. Thus, these actions could reduce the yields on assets that we are targeting for purchase, thereby reducing our net interest spreads. Alternatively, the Federal Reserve’s actions may not have the intended impact and could create inflation and higher interest rates. This could negatively impact our net book value or our funding cost.

3) Interest rates rise (this is likely as soon as the end of QE 2)

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.

Safe Bulkers (SB) book value as of December 31st, 2010 is $3.71 per share:

Tangible assets: $805.372 M (mostly 16 dry bulk ships)

Intangible assets: none

Preferred stock: none

Bonds: none

Minus  Total liabilities: $561.239 M (mostly loans for ship purchases)

Equals shareholder equity: $244.133 M

Book value = equity / number of shares = $244.133 M / 65.88 M = a book value of $3.71 per share.  I don’t see any risk factors in Safe Bulkers annual report that could affect their book value.  The prices of ships are easy to determine and their prices are very visible to those who interact with ship brokers.

* * * * * * *

Chapter 42

BALANCE-SHEET ANALYSIS.

SIGNIFICANCE OF BOOK VALUE

ON NUMEROUS OCCASIONS prior to this point we have expressed our conviction that the balance sheet deserves more attention than Wall Street has been willing to accord it for many years past. By way of introduction to this section of our work, let us list five types of information and guidance that the investor may derive from a study of the balance sheet:

1. It shows how much capital is invested in the business.

2. It reveals the ease or stringency of the company’s financial condition, i.e.,

the working-capital position.

3. It contains the details of the capitalization structure.

4. It provides an important check upon the validity of the reported earnings.

5. It supplies the basis for analyzing the sources of income.

In dealing with the first of these functions of the balance sheet, we shall begin by presenting certain definitions. The book value of a stock is the value of the assets applicable thereto as shown in the balance sheet.  It is customary to restrict this value to the tangible assets, i.e., to eliminate from the calculation such items as good-will, trade names, patents, franchises, leaseholds. The book value is also referred to as the “asset value,” and sometimes as the “tangible-asset value,” to make clear that intangibles are not included. In the case of common stocks, it is also frequently termed the “equity.”

Computation of Book Value. The book value per share of a common stock is found by adding up all the tangible assets, subtracting all liabilities and stock issues ahead of the common and then dividing by the number of shares.

In many cases the following formula will be found to furnish a short cut to the answer:

= (Common Stock + Surplus Items – Intangibles) / Number of shares outstanding

By Surplus Items are meant not only items clearly marked as surplus but also premiums on capital stock and such reserves as are really part of the surplus. This would include, for example, reserves for preferred-stock retirement, for plant improvement, and for contingencies (unless known to be actually needed). Reserves of this character may be termed “Voluntary Reserves.”

* * * * * * *

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Is AGNC really a low P/E stock?

The current price/earnings ratio of AGNC is highly deceptive:

Morningstar reports a forward P/E of 6.1.

Google Finance reports a P/E of 3.69.

Yahoo! Finance reports a P/E (ttm) of 3.53.

These are all low numbers.  Single digit P/E ratios usually indicate possible value investments.  But let’s take a closer look at AGNC’s earnings.  Let’s adjust them for the amazing increase in the number of shares issued and used to leverage up the purchase more agency securities in the government subsidized mortgage market.

American Capital Agency Corp. (AGNC)

Shares: 124.63 M (only 36 M at end of 2010)

Market price: $27.83

Dividend yield: 20.1%

Quarterly dividend: $1.40

(EPS adjusted for drastic changes in capitalization)

                        Net inc.

            EPS     Avail.              Adj. EPS

2006

2007

2008    $2.36   $35 M              $0.28

2009    $6.78   $119 M            $0.95

2010    $7.89   $228 M            $2.31

Three year average earnings equals $1.18 per share.  Value investments typically start below 12 times average earnings.  In AGNC’s case 12 times average earnings equals $14.16 per share.  20 time average earnings equals $23.60 per share.  AGNC is currently selling for 23.6 times average earnings.  This is above 20 which makes a purchase of AGNC above $23.60 a speculative purchase.

Suddenly those low current P/Es don’t seem to hold up anymore when you calculate AGNC’s average earning power over the past three years.

I have warning in other articles that AGNC is will not be able to pay its hefty $1.40 dividend with so many new shares being issued.   If it uses the proceeds of the public offering to pay the current quarter’s dividend, then it is just bidding time before it disappoints shareholders with a larger dividend cut in the future when net income decreases due to a narrowing of the interest rate spread.  That’s how they make their money.

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American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to "Neutral".

I downgraded American Capital Agency Corp. (AGNC) a several months ago because it isn’t earning enough money to sustain the quarterly $1.40 dividend payment.  You can see in this downgrade from Zacks that the company only earned $1.26 last quarter.

Click here to see all my analysis on AGNC: http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

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Link to original article: http://www.americanbankingnews.com/2011/04/01/american-capital-agency-corp-agnc-downgraded-by-zacks-investment-research-to-neutral/#

American Capital Agency Corp. (AGNC) Downgraded by Zacks Investment Research to “Neutral”

April 1st, 2011 • View CommentsFiled Under • by ABMN Staff

Filed Under: Analysts DowngradesMarket NewsZacks

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Equities research analysts at Zacks Investment Research downgraded shares of American Capital Agency Corp. (NASDAQ: AGNC) from an “outperform” rating to a “neutral” rating in a research note to investors on Thursday. The analysts currently have a $30.00 price target on the stock.

Analyst Meenu Goyal wrote, “We are changing our long-term recommendation for American Capital from Outperform to Neutral as we anticipate it to perform in line with the broader market. American Capital focuses exclusively on fixed-rate agency securities guaranteed by the U.S. government, which limits its credit risks. American Capital is also among a selected group of companies who have increased its dividend during the economic crisis. The company paid a total of $364.0 million in dividends or $13.26 per share since its initial public offering in May 2008. However, increased volatility and deterioration in the broader residential mortgage and RMBS markets limits the upside potential of the company going forward. “

Separately, analysts at Keefe, Bruyette & Woods, Inc upgraded shares of American Capital Agency Corp. from a “market perform” rating to an “outperform” rating in a research note to investors on Friday, February 11st. Also, analysts at Deutsche Bank (NYSE: DB) raised their price target on shares of American Capital Agency Corp. from $28.00 to $30.00 in a research note to investors on Wednesday, February 9th. They now have a “hold” rating on the stock.

Shares of American Capital Agency Corp. traded down 0.75% during mid-day trading on Friday, hitting $28.9226. American Capital Agency Corp. has a 52 week low of $24.06 and a 52 week high of $30.68. The stock’s 50-day moving average is $29.43 and its 200-day moving average is $28.91. The company has a market cap of $2.654 billion and a price-to-earnings ratio of 3.69.

American Capital Agency Corp. last announced its quarterly results on Tuesday, February 8th. The company reported $1.26 earnings per share (EPS) for the previous quarter, beating the Thomson Reuters consensus estimate of $1.25 EPS by $0.01. During the same quarter in the prior year, the company posted $1.79 earnings per share. The company’s quarterly revenue was up 185.1% on a year-over-year basis. On average, analysts predict that American Capital Agency Corp. will post $0.00 EPS next quarter.

American Capital Agency Corp. (AGNC) is a real estate investment trust (REIT). AGNC earns income primarily from investing in residential mortgage pass-through securities and collateralized mortgage obligations. These investments consist of securities, for which the principal and interest payments are guaranteed by United States Government-sponsored entities, such as the Federal National Mortgage Association (Fannie Mae) and the Federal Home Loan Mortgage Corporation (Freddie Mac) or by a United States Government agency, such as the Government National Mortgage Association (Ginnie Mae). The Company is externally managed by American Capital Agency Management, LLC, a subsidiary of a wholly owned portfolio company of American Capital, Ltd.

For more information about Zacks Investment Research’s equity research offerings, visit Zacks.com.

Examples of Speculative and Investment Common Stocks You've Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

Image001

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

* * * * * * *

Comments on the Various Groups.  The companies listed in Group A are representative of the so-called “first-grade” or “blue-chip” industrials, which were particularly favored in the great speculation of 1928-1929 and in the markets of ensuing years.  They are characterized by a strong financial position, by presumably excellent prospects and in most cases by relatively stable or growing earnings in the past.  The market price of the shares; however, was higher than would be justified by their average earnings.  In fact the profits of the best year in the 1929-1938 decade were less than 8% of the December 1938 market price.  It is also characteristic of such issues that they sell for enormous premiums above the actual capital invested.

            The companies analyzed in Group B are obviously speculative, because of great instability of their earning records.  They show varying relationships of market price to average earnings, maximum earnings, and asset values.

            The common stocks shown in Group C are examples of those which meet specific and quantitative tests of investment quality.  These tests include the following:

1.      The earnings have been reasonably stable, allowing for the tremendous fluctuations in business conditions during the ten-year period.

2.      The average earnings bear a satisfactory ratio to market price.

3.      The financial set-up is sufficiently conservative, and the working-capital position is strong.

Although we do not suggest that common stock bought for investment be required to show asset values equal to the price paid, it is non the less characteristic of Group C that, as a whole, they will not sell for a huge premium above the companies’ actual resources.

            Common-stock investment, as we envisage it, will confine itself to issues making exhibits of the kind illustrated by Group C.  But the actual purchase of any such issue must require also that the purchaser be satisfied in his own mind that the prospects of the enterprise are at least reasonably favorable.

* * * * * * *

Safe Bulkers is a dry bulk shipper with around sixteen ships rented out to various customers.  The dry bulk market suffering due to the global recession and a glut of ships built during the boom, but Safe Bulkers is well positioned to prosper in even that harsh environment.  Its prospects and the industries are good.

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Examples of Speculative and Investment Common Stocks You've Got to See.

The second edition of Security Analysis provided several examples of speculative and investment common stocks.  The examples are so illustrative, but they are from 1940.  I wanted to bring the text of this section of the book into this blog with examples from several of the stocks that I have blogged about on www.myhighdividendstocks.com .

I chose the following stocks for examples: Goldcorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), Seadrill Limited (SDRL), Safe Bulkers (SB), and AT&T.  Let me tell you why I chose these stocks.  I wanted to also include Terra Nitrogen (TNH), but the results table would have been too unreadable.

Goldcorp (GG)  I used to own Goldcorp when it was priced in the high teens and twenties.  I wanted to revisit it because it is also in many gold mining stock funds such as FSAGX.  I currently own FSAGX in my 401(k) account and I’m considering selling it.  You will see why momentarily.

Proctor & Gamble (PG)  This stock is often written about in dividend aristocrat articles.  It pays a modest dividend and grows its dividend annually like clockwork.  Many people watch this dividend stock.

American Capital Agency Corp. (AGNC)  I’ve included it because I have written many articles on this ultra-high dividend stock.  I don’t like it because its earnings can’t support the current dividend payout.  It balance sheet is horrible like all financial institutions (e.g. banks).

Seadrill Limited (SDRL)  This stock turned up on one of my high dividend stock screens and warrants further investigation to determine if it is speculative or investment grade.

Safe Bulkers (SB)  I love this high dividend stock with earning power and a strong balance sheet.  You will see why in moments.

AT&T (T)  I pays almost a 6% dividend and it is and dividend aristocrat.  Many eyes are on this one so I want to know at what price is it a value buy.

* * * * * * *

Examples of Speculative and Investment Common Stocks.  Our definition of an investment basis for common-stock purchases is a variance with the Wall Street practice in respect to common stocks of high rating.  For such issues a price of considerably more than 20 times average earnings is held to be warranted, and furthermore these stocks are designated as “investment issues” regardless of the price at which they sell.  According to our view, the high prices paid for “the best common stocks” make these purchases essentially speculative, because they require future growth to justify them.  Hence common-stock investment operations, as we define them, will occupy a middle ground in the market, lying between low-price issues that are speculative because of doubtful quality and well-entrenched issues that are speculative, none the less, because of their high price.

* * * * * * *

There were three groups of examples in Security Analysis.  Group A were common stocks speculative in December 1938 because of their high price (figures were adjusted to reflect changes in capitalization).  The companies in group A were: General Electric, Coca Cola, and Johns-Manville.  Proctor & Gamble and AT&T sort of fit into the Group A category.

Group B were common stocks speculative in December 1938 because of their irregular record.  Group B in 1938 was comprised of the following companies: Goodyear Tire and Rubber, Simmons, and Youngstown Sheet and Tube.  American Capital Agency Corp., Seadrill Limited and Goldcorp are definitely Group B.  Goldcorp also has a poor divided and a high price.  AGNC is irregular with a high price.

Group C were common stocks meeting investment tests in December 1938 from the quantitative standpoint.  They included Adams-Millis, American Safety Razor, and J.J. Newberry.  I have never heard of any of these stocks.  The only stock in my example that makes this cut is Safe Bulkers.  This is why Safe Bulkers is in my best dividend stocks category.

Item

Goldcorp (GG)

Proctor & Gamble (PG)

American Capital Agency Corp. (AGNC)

Seadrill Limited (SDRL)

Safe Bulkers (SB)

AT&T (T)

Dividend Yield

0.84%

3.14%

19.50%

7.46%

6.85%

5.77%

Earnings per share

2001

?

?

-

-

-

?

2002

?

?

-

-

-

?

2003

?

?

-

-

-

?

2004

?

?

-

-

-

?

2005

$0.35

?

-

-

?

?

2006

$0.51

$3.05*

-

$0.56

$1.48

$1.24

2007

$0.58

$3.64*

-

$1.32

$3.18

$2.02

2008

$1.85

$4.25*

$0.28

($0.43)

$1.81

$2.18

2009

$0.30

$4.73*

$0.94

$3.31

$2.51

$2.05

2010

$1.64

$4.47*

$2.30

?

$1.66

$3.36

10-yr. average

?

?

-

-

-

?

5-yr. average (2006-2010)

$0.98

$4.03

3-yr. average

$1.17

4-yr. average

$1.19

$2.13

$2.17

12 times 5Y average earnings

$11.71

$48.36

$14.08

$14.28

$25.56

$26.04

20 times 5Y average earnings

$19.60

$80.60

A Mechanical Check for Investment in Common Stocks. The First in a Series.

In this blog post I’m going discuss some aspects of the mechanical tests your should apply to common stocks you are considering to buy and at what price.

On March 16th, 2011 I wrote about not buying a common stock generally above 20 times average earnings in this post: http://bit.ly/MaxAvgPE .  I have to admit that I was a little lazy.  Like most people I used 20 times the current annual earnings to complete the table in that blog post because it the info was readily available, but a five or ten year average is more through and enlightening.  It takes a while to find all the earnings data for the past ten years and then to make adjustments for changes in capitalization, warrants, and convertible preferred stocks.

The excerpt below from Benjamin Graham’s Security Analysis 2nd edition is a devastating indictment on how speculative so-called investors are both in 1940 and today.

Over the next couple of days I’m going to calculate many values for testing common stocks for investment basis that I’ve already written about on this blog.  The goal is separate the speculative stocks from the investment stocks.  The list includes: GoldCorp (GG), Proctor & Gamble (PG), American Capital Agency Corp. (AGNC), SeaDrill (SDRL), Safe Bulkers (SB), and AT&T (T).

* * * * * * *

Higher Prices May Prevail for Speculative Commitments.  The intent of this distinction must be clearly understood.  We do not imply that it is a mistake to pay more than 20 times average earnings for any common stock.  We do suggest that such a price would be speculative.  The purchase may easily turn out to be highly profitable, but in that case it will have proved a wise or fortunate speculation.  It is proper to remark, moreover, that very few people are consistently wise or fortunate in their speculative operations.  Hence we may submit, as a corollary of no small practical importance, that people who habitually purchase common stocks at more than about 20 times their average earnings are likely to lose considerable money in the long run.  This is the more probable because, in the absence of such a mechanical check, they are prone to succumb recurrently to the lure of bull markets, which always find some specious argument to justify paying extravagant prices for common stocks.

            Other Requisites for Common Stocks of Investment Grade and a Corollary Therefrom.  It should be pointed out that if 20 times average earnings is taken as the upper limit of price for an investment purchase, then ordinarily the price paid should be substantially less than this maximum.  This suggests that about 12 or 12.5 times earnings may be suitable for the typical case of a company with neutral prospects.  We must emphasize also that a reasonable ratio of market price to average earnings is not the only requisite for a common-stock investment.  It is a necessary but not sufficient condition.  The company must be satisfactory also in its financial set-up and management, and not unsatisfactory in its prospects.

            From this principle there follows another important corollary, viz.: An attractive common-stock investment is an attractive speculation.  This is true because, if a common stock can meet the demand of a conservative investor that he get full value for his money plus not unsatisfactory future prospects, then such an issue must also have a fair chance of appreciating in market value.

* * * * * * * *

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Even Jim Cramer is skeptical about AGNC.

Jim Cramer is now a critic of American Capital Agency Corp. (AGNC).

* * * * * * *

by Jason Smith | March 28th  |  Filed in: Dividend News

MORTGAGE REITS METRICS

Avg. Market Cap:

$1.3B

Avg. P/E Ratio:

10.9

Avg. Div Yield:

9.8%

Following comments by “Mad Money” host Jim Cramer about the group, the Mortage Investment Stocks is trading lower by 0.1% today.

Surprisingly, American Capital Agency (AGNC) is up 1% after Cramer questioned how the company can feature such a high yield. Shares of American Capital Agency currently yield a whopping 19.3% based on past distributions. Shares of Annaly Capital Management (NLY) are down about half a percent despite Cramer saying that is the one stock in the group that he recommends. “I feel real good about that one,” Cramer said in reference to Annaly.

Among other high-yielding mortgage REITs, Northstar Realty Finance (NRF) is up 2%. Those units now yield 8% based on past distributions. PennyMac Mortgage (PMT), with its 9.2% yield based on past distributions, is up 1%. Anworth Mortgage Asset (ANH), with a yield of 12.3% based on past distributions, is down 1% while Capstead Mortgage (CMO), which also sports a 12.3% yield based on past distributions, is down half a percent.

* * * * * * * *

Link to original article: http://www.tickerspy.com/newswire/?p=4245

AGNC has a whopping dividend, but diminishing earning power and a weak balance sheet.

Disclosure: I don’t own AGNC.

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