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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 will probably cut its dividend

American Capital Agency Corp. (AGNC) will have to cut its dividend at some point in a few quarters if its operating results are similar to the 3Q 2010 it just reported.
 
Recap: AGNC reported earnings of $1.69 per share during third quarter 2010, compared to $1.82 in the year-earlier quarter. Excluding non-recurring items, recurring net income for the reported quarter was $1.11 per share.
 
Its current dividend is $1.40 per share.  That equates to a 126% dividend payout ratio (1.40 divided by 1.11).  Dividend payout ratios above 100% can't go on forever.  The company only has $115.3 million in cash and cash equivalents to pay for the gap between its dividend and its recurrent earnings.  It could sell some of its agency security holdings like it did this quarter, but you should count on this tactic to earn money everytime.
 
The whole banking system is a house of fractional-reserve cards.  Stay away from it.
 
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AGNC reported 3Q2010 earnings of $1.69/share and dividend of $1.40/share

AGNC just released it 3Q2010 earnings.  You can read the whole press release at this link http://finance.yahoo.com/news/AGNC-Reports-169-Earnings-Per-prnews-187565066.html?x=0&.v=1
 
Some highlights include:

THIRD QUARTER 2010 FINANCIAL HIGHLIGHTS

  • $1.69 per share of net income
    • $1.11 per share, excluding $0.59 per share of other investment related income and $0.01 per share of accrued excise tax
  • $1.59 per share of taxable income
  • $1.40 per share dividend declared
I find the "other investment related income" interesting.  They sold agency securities.  Did they sell them to lower the dividend payout ratio?
 
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AGNC 3Q2010 earnings release

Press Release Source: American Capital Agency Corp. 
On Tuesday October 26, 2010, 4:20 pm EDT

BETHESDA, Md.

Oct. 26 /PRNewswire-FirstCall/ -- American Capital Agency Corp. ("AGNC" or the "Company") (Nasdaq:AGNC - News) today reported net income for the third quarter of 2010 of $60.0 million, or $1.69per share, and book value of $23.43 per share.

THIRD QUARTER 2010 FINANCIAL HIGHLIGHTS

  • $1.69 per share of net income
    • $1.11 per share, excluding $0.59 per share of other investment related income and$0.01 per share of accrued excise tax
  • $1.59 per share of taxable income
  • $1.40 per share dividend declared
  • $0.99 per share of undistributed taxable income as of September 30, 2010
    • Undistributed taxable income was $39 million as of September 30, 2010, a $2 millionincrease from June 30, 2010
    • $0.74 per share, pro forma, when adjusted for the $328 million follow-on equity offering that settled on October 1, 2010
  • $23.43 book value per share as of September 30, 2010
    • $23.78 per share, pro forma, when adjusted for the follow-on equity offering
  • 27.9% annualized return on average stockholders' equity ("ROE") for the quarter
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AGNC analysis of the income account> losses of subsidiaries

You should carefully examine the consolidated earnings statements of companies that own subsidiaries and significant interest in other companies.  Some companies in the past have under reported the losses of their subsidiaries and manipulated the surplus account in nefarious ways in order to make their earnings per share look less volatile.  You should adjust the earnings of the company you are analyzing accordingly to determine their true earning power.

American Capital Agency Corp. (AGNC) is a subsidiary of American Capital Ltd (ACAS).  I’m not analyzing the parent company, so I’m not going to go through the pains of investigating American Capital. 

American Capital Agency Corp. (AGNC) owns a single wholly-owned subsidiary called American Capital Agency TRS, LLC.  I learned this from Note 1 in its most recent 10-K filing.

Here is the hierarchy:

American Capital LTD owns American Capital LLC which owns American Capital Agency Corp.

Note 1. Unaudited Interim Consolidated Financial Statements

The interim consolidated financial statements of American Capital Agency Corp. (together with its consolidated subsidiary, is referred throughout this report as the “Company”, “we”, “us” and “our”) are prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and pursuant to the requirements for reporting on Form 10−Q and Article 10 of Regulation S−X. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates.

Our unaudited consolidated financial statements include the accounts of our wholly−owned subsidiary, American Capital Agency TRS, LLC.  Significant intercompany accounts and transactions have been eliminated. In the opinion of management, all adjustments, consisting solely of normal recurring accruals, necessary for the fair presentation of financial statements for the interim period have been included. The current period’s results of operations are not necessarily indicative of results that ultimately may be achieved for the year. There has been no activity in American Capital Agency TRS, LLC during the six months ended June 30, 2010 and 2009.

 

AGNC has consolidated the accounts of its subsidiary into its reported.  I don’t see any manipulation or hiding of losses by AGNC.  No adjustments to the earnings are necessary for the profits/losses of subsidiaries.

Here is the summary paragraph from the end of the section on losses of subsidiaries in the wonderful book Securities Analysis.

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To avoid leaving this point in confusion, we shall summarize our treatment by suggesting:

1.       In the first instance, subsidiary losses are to be deducted in every analysis [of the income account]

2.       If the amount involved is significant, then the analyst should investigate whether or not the losses may be subject to early termination.

3.       If the result of this examination is favorable, the analyst may consider all or part of the subsidiary’s loss as the equivalent of a nonrecurring item.

-----

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AGNC analysis of the income account> Fictitious value placed on stock dividends received

American Capital Agency Corp. (AGNC) does not own any controlling interest in another company’s stock.  Also, it has never received any stock dividends.  Therefore, no adjustments to its earnings are necessary for fictitious value placed on stock dividends received.

Read the relevant section from Securities Analysis below to see how some other companies in the past have padded their earnings with fictitious stock dividend values.

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Fictitious Value Placed on Stock Dividends Received. From 1922 on most of the United Cigar Stores common shares were held by Tobacco Products Corporation, an enterprise controlled by the same interests. This was an important company, the market value of its shares averaging more than $100,000,000 in 1926 and 1927. The accounting practice of Tobacco Products introduced still another way of padding the income account, viz., by placing a fictitious valuation upon stock dividends received.

For the year 1926 the company’s earnings statement read as follows:

Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,790,000

Income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 400,000

Class A dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,136,000

Balance for common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,254,000

Earned per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Market range for common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 117–95

Detailed information regarding the company’s affairs during that period has never been published (the New York Stock Exchange having been unaccountably willing to list new shares on submission of an extremely sketchy exhibit). Sufficient information is available, however, to indicate that the net income was made up substantially as follows:

Rental received from lease of assets to American Tobacco Co. . . . . . . . . . . $ 2,500,000

Cash dividends on United Cigar Stores common (80% of total paid) . . . . . $ 2,950,000

Stock dividends on United Cigar Stores common

(par value $1,840,000), less expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 5,340,000

Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,790,000

It is to be noted that Tobacco Products must have valued the stock dividends received from United Cigar Stores at about three times their face value, i.e., at three times the value at which United Cigar charged them against surplus. Presumably the basis of this valuation by Tobacco Products was the market price of United Cigar Stores shares, which price was easily manipulated due to the small amount of stock not owned by Tobacco Products.

When a holding company takes into its income account stock dividends received at a higher value than that assigned them by the subsidiary that pays them, we have a particularly dangerous form of pyramiding of earnings. The New York Stock Exchange, beginning in 1929, has made stringent regulations forbidding this practice. (The point was discussed in Chap. 30.) In the case of Tobacco Products the device was especially objectionable because the stock dividend was issued in the first instance to represent a fictitious element of earnings, i.e., the appreciation of leasehold values. By unscrupulous exploitation of the holding-company mechanism these imaginary profits were effectively multiplied by three.

On a consolidated earnings basis, the report of Tobacco Products for 1926 would read as follows:

American Tobacco Co. lease income, less income tax, etc. . . . . . . . . . . . $2,100,000

80% of earnings on United Cigar Stores common . . . . . . . . . . . . . . . . . .$ 6,828,000*

$7,928,000

Class A dividend . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,136,000

Balance for common . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,792,000

Earned per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7.27

* Excluding leasehold appreciation.

The reported earnings for Tobacco Products common given as $11 per share are seen to have been overstated by about 50%.

It may be stated as a Wall-Street maxim that where manipulation of accounts is found, stock juggling will be found also in some form or other. Familiarity with the methods of questionable finance should assist the analyst and perhaps even the public, in detecting such practices when they are perpetrated.

AGNC analysis of the income account> morals from foregoing examples

To the best of my present knowledge AGNC has not manipulated it earnings using accounting gimmicks; therefore, you don’t need to avoid it for those reasons alone.  If this is the first post of mine that you are reading, then please type AGNC into the search box near the top of the blog.  That search will return a list of article I’ve written on AGNC.

I have a feeling that I’m not to be as forgiving to AGNC when I examine its assets.  Most of its assets are agency securities that are probably worth a lot less than AGNC claims in their 10-K filings with the SEC.

If investors would have followed the advice below they would save themselves the misery of owning Enron and MCI World Com to name just a few epic failures.
 
Here is the relevant excerpt from Securities Analysis:

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Moral Drawn from Foregoing Examples. A moral of considerable practical utility may be drawn from the United Cigar Stores example.  When an enterprise pursues questionable accounting policies, all its securities must be shunned by the investor, no matter how safe or attractive some of them may appear. This is well illustrated by United Cigar Stores Preferred, which made an exceedingly impressive statistical showing for many successive years but later narrowly escaped complete extinction.  Investors confronted with the strange bookkeeping detailed above might have reasoned that the issue was still perfectly sound, because, when the 
overstatement of earnings was corrected, the margin of safety remained more than ample. Such reasoning is fallacious. You cannot make a quantitative deduction to allow for an unscrupulous management; the only way to deal with such situations is to avoid them.

AGNC Commences Public Offering of Common Stock

AGNC's stock price dropped 4.61% this afternoon on the news that it is offering 10 million shares of additional common stock.  This shouldn't be a big surprise to anyone who has examined AGNC's quarterly 10-K filings.  They routinely issue stock to attain paid-in capital to buy more "agency securities".  The company had 33.6 million shares as of June 2010.  It will likely have 43.6 million shares after the new shares are sold.

What is interesting is that AGNC paid $1.30 per share dividend last quarter (2Q 2010).  The dividend cost AGNC $47.1 million dollars.  That dividend payment exceeded it quarterly earnings of $36.8 million dollars.  Then just a few weeks ago it declared that it will pay $1.30 for the third quarter of 2010, but now it will have 43.6 million shares at $1.30/share for a total dividend payment of $56.7 million dollars.

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AGNC Commences Public Offering of Common Stock

BETHESDA, Md., Sept 27, 2010 /PRNewswire via COMTEX/ -- American Capital Agency Corp.(AGNC 26.70-1.29-4.61%) ("AGNC" or the "Company") announced today that it intends to offer, subject to market and other conditions, 10,000,000 shares of its common stock in an underwritten public offering. In connection with the offering, the Company intends to grant the underwriters an option for 30 days to purchase up to an additional 1,500,000 shares of common stock to cover overallotments, if any.

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

BofA Merrill Lynch, Citi, Deutsche Bank Securities and UBS Investment Bank are joint book-running managers for the offering.

The offering will be made pursuant to AGNC's existing shelf registration statement, previously filed with and declared effective by the Securities and Exchange Commission. The offering of these securities will be made only by means of a prospectus and a related prospectus supplement. When available, copies of the prospectus and prospectus supplement may be obtained from BofA Merrill Lynch, Attn: Prospectus Department, 4 World Financial Center, New York, New York 10080; Citi, Brooklyn Army Terminal, 140 58th Street, 8th Floor, Brooklyn, New York 11220; telephone: (800) 831-9146; Deutsche Bank Securities, Prospectus Department, Harborside Financial Center, 100 Plaza One, Jersey City, New Jersey 07311-3988; telephone: (800) 503-4611 or UBS Investment Bank, Attn: Prospectus Department, 299 Park Avenue, New York, New York 10171; telephone: (888) 827-7275.

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.

ABOUT AGNC

AGNC is a REIT that invests in agency pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government agency or a U.S. Government-sponsored entity. The Company is externally managed and advised by American Capital Agency Management, LLC, an affiliate of American Capital, Ltd. ("American Capital"). For further information, please refer to www.AGNC.com.

Here is the link to the rest of the legalese: http://www.marketwatch.com/story/agnc-commences-public-offering-of-common-stock-2010-09-27?reflink=MW_news_stmp 

AGNC analysis of the income account> balance sheet and income tax check upon the published earnings statements

American Capital Agency Corp. (AGNC) qualifies as a real estate investment trust (REIT).  They elected to be taxed as a REIT under the unconstitutional Internal Revenue Code of 1986.  In order to avoid U.S. federal or state corporate taxes, AGNC is required by the men with guns (government) to distrubute annually 90% of their taxable income.   Therefore, we don’t need to check its income tax filings to double-check the honesty of their earnings statements.
 
Note: I wish that we could live in a voluntary society where each business could decide on its own how much of its earnings to distribute to its owners.  No businesses should be taxed.  In a truly free market some businesses would choose to distribute 90% and some would decide to distribute 30%.  Some would decide to distrubute none.  No businesses should be taxed.  Taxes take money away from the employees and owners in the form of taxes.  Individuals shouldn't be taxed either.  However, we are not free so I digress.

 

Please read the excerpt from Securities Analysis below to get an idea how to apply this action step to your own securities holdings.

 

 

Balance-sheet and Income-tax Checks upon the Published Earnings Statements. The Park and Tilford case illustrates the necessity of relating an analysis of income accounts to an examination of the appurtenant balance sheets. This is a point that cannot be stressed too strongly, in view of Wall Street’s naïve acceptance of reported income and reported earnings per share. Our example suggests also a further check upon the reliability of the published earnings statements, viz., by the amount of the federal income tax accrued. The taxable profit can be calculated fairly readily from the income-tax accrual, and this profit compared in turn with the earnings reported to stockholders. The two figures should not necessarily be the same, since the intricacies of the tax laws may give rise to a number of divergences.2 We do not suggest that any effort be made to reconcile the amounts absolutely but only that very wide differences be noted and made the subject of further inquiry.

The Park and Tilford figures analyzed from this viewpoint supply the suggestive results as shown in the table on page 436.

 

The close correspondence of the tax accrual with the reported income during the earlier period makes the later discrepancy appear the more striking. These figures eloquently cast suspicion upon the truthfulness of the reports made to the stockholders during 1927–1929, at which time considerable manipulation was apparently going on in the shares.

 

This and other examples discussed herein point strongly to the need for independent audits of corporate statements by certified public accountants. It may be suggested also that annual reports should include a detailed reconcilement of the net earnings reported to the shareholders with the 2 See Appendix Note 51, p. 787, for a brief résumé of these divergences. net income upon which the federal tax is paid. In our opinion a good deal of the information relative to minor matters that appears in registration statements and prospectuses might be dispensed with to general advantage; but if, in lieu thereof, the S.E.C. were to require such a reconcilement, the cause of security analysis would be greatly advanced.

 

 

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AGNC analysis of the income account> earnings of subsidiaries

We need to examine American Capital Agency Corp’s (AGNC) earnings statements and balance sheets to make sure there are no misleading artifices in their income account.  Today we will check to make sure they didn’t manipulate their earnings by padding their income account with some subsidiary sleight-of-hand.  This is easy since AGNC has no subsidiaries.  No adjustments are necessary.

 

Please read this excerpt from Securities Analysis on the topic and apply it to stock you own or are considering to purchase with subsidiaries.

 

 

On comparatively rare occasions, managements resort to padding their income account by including items in earnings that have no real existence.  One flagrant corporation did the following during the Great Depression:

 

“An examination of the balance sheets discloses that during these two years the item of Good-will and Trade-marks was written up successively from $1,000,000 to $1,600,000 and then to $2,000,000, and these increases deducted from the expenses for the period.

 

These figures show a reduction of $1,600,000 in net current assets in 15 months, or $1,000,000 more than the cash dividends paid. This shrinkage was concealed by a $1,000,000 write-up of Good-will and Trademarks.  No statement relating to these amazing entries was vouchsafed to the stockholders in the annual reports or to the New York Stock Exchange in subsequent listing applications. In answer to an individual inquiry, however, the company stated that these additions to Good-will and Trade-marks represented expenditures for advertising and other sales efforts to develop the business of Tintex Company, Inc., a subsidiary.

 

The charging of current advertising expense to the good-will account is inadmissible under all canons of sound accounting. To do so without any disclosure to the stockholders is still more discreditable. It is difficult to believe, moreover, that the sum of $600,000 could have been expended for this purpose by Park and Tilford in the three months between September 30 and December 31, 1929. The entry appears therefore to have included a recrediting to current income of expenditures made in a previous period, and to that extent the results for the fourth quarter of 1929 may have been flagrantly distorted. Needless to say, no accountants’ certificate accompanied the annual statements of this enterprise.”

 

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AGNC Declares $1.40 Third Quarter Dividend

AGNC will maintain its $1.40 dividend.  I wonder if the dividend will exceed the earnings per share for a second straight quarter.  AGNC earned $1.23 per share back in June 2010 and paid a dividend of $1.40.  That equated to a 113% payout ratio.  If the EPS comes in below $1.40 again, then the stock should move lower because the dividend will not be sustainable for very long.  AGNC had $25,359,000 of retained earnings as of the end of June 2010 in which to draw upon to make up the difference between earnings and the dividend payment.  If they continued to earn $1.23/share, then they could pay the $1.40 dividend for another five or so quarters.

AGNC Declares $1.40 Third Quarter Dividend

BETHESDA, Md., Sept 14, 2010 /PRNewswire via COMTEX/ -- American Capital Agency Corp. (Nasdaq: AGNC) ("AGNC" or the "Company") announced today that its Board of Directors has declared a cash dividend of $1.40 per share for the third quarter 2010. The dividend is payable on October 27, 2010 to common shareholders of record as of September 28, 2010, with an ex-dividend date of September 24, 2010.

Here is the link to the press release:
http://ir.agnc.com/phoenix.zhtml?c=219916&p=irol-newsArticle&ID=1471118&highlight=