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 earnings power

American Capital Agency Corp. (AGNC) has a massive dividend of near
20%. That easily meets my first criteria for a high dividend stock
which is a dividend yield greater than 6%.

But what about its earning power? I like at least five years of
annual earnings to examine, but ten years is even better. A longer
record of earnings will usually encompass at least one Keynesian
central bank induced boom-bust cycle (e.g. 2001 - present). It is
important to know how the business performed at the top of the boom
and the bottom of the bust in order to determine the average earning
power.

AGNC earnings power

Year, Earnings
2005, not in business
2006, not in business
2007, not in business
2008, $2.36, MAY to DEC ($3.15 annualized)
2009, $6.78
2010 (my est.), $6.28 - $7.18*

Low average = $5.40 EPS/year [($3.15+$6.78+$6.28)/3]
High average = $5.70 EPS/year [($3.15+$6.78+$7.18)/3]

AGNC has been paying a $1.40 quarterly dividend for the last 5
quarters. That equates to a $5.60 annual dividend payment per share
if the company does not change the dividend. It is just too soon to
tell if the average earnings power of AGNC can sustain that $1.40
quarterly dividend. The company's interest rate spreads tightened in
the last quarter. The company's net income will decline if the
interest rates spread tightens and that will lower earnings per share.

I would personally stay away from any bank, financial, insurance, or
REIT unless you can understand how the company makes money. I'm still
confused by much of what I read in AGNC's annual and quarterly
reports. I'm staying away from AGNC despite its huge dividend. I
don't think the dividend is very safe.

AGNC closed today at $29.47.

*2010 earnings by quarter
2010 Q1, $2.13
2010 Q2, $1.23
2010 Q3, $1.69
2010 Q4, $?.?? (low $1.23 - high $2.13)

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I like Safe Bulkers (SB). Buy it when the market tanks

Safe Bulkers (SB) Declares $0.15 Quarterly Dividend; 10.7% Yield

November 8, 2010 5:27 PM EST

Safe Bulkers, Inc. (NYSE: SB) on Monday announced that its Board of
Directors has declared a cash dividend on its common stock of $0.15
per share, $0.60 annualized.

The dividend is payable on or about November 26, 2010 to shareholders
of record at the close of trading of the Company's common stock on
November 19, 2010. The ex-dividend date is November 17, 2010.

The yield is 10.7%

http://www.streetinsider.com/Dividends/Safe+Bulkers+(SB)+Declares+$0.15+Quarterly+Dividend%3B+10.7%25+Yield/6087085.html

I've done a lot of research on this company, but not a lot of
writing/blogging on it. I would by this stock on any market
correction.

Disclosure: I don't own any SB right now.

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> 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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A small increase to interest rates will burst the bond bubble

Bonds are definately in a bubble.  This is a good article that explains how a small uptick in several interest rates will pop the bond bubble.  It is going to be so sad to see more people's retirement dreams destroyed by the Federal Reserve's manipulation of interest rates.  The market (people's time preference for money) should determine interest rates.
 

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=

AGNC analysis of the income account> extraordinary losses> amortization of bond discount

American Capital Agency Corp. (AGNC) has not floated any bonds since it began operating in May 2008.  Therefore, no adjustments to its income account are necessary for amortization of bond discount.  You can see from their most recent quarterly 10-K filing that they have no bond liabilities.  Their biggest liabilities are repurchase agreements (6.6 billion dollars).  Repurchase agreements are not bonds.

 

The bottom line is that companies can manipulate their future earnings by charging amortization of bond discounts to their surplus instead of their income statements.

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

Here is the relevant section from Securities Analysis:

 

Amortization of Bond Discount. Bonds are usually floated by corporations at a price to net the treasury less than par. The discount suffered is part of the cost of borrowing the money, i.e., part of the interest burden, and it should be amortized over the life of the bond issue by an annual charge against earnings, included with the statement of interest paid. It was formerly considered “conservative” to write off such bond discounts by a single charge against surplus, in order not to show so intangible an item among the assets on the balance sheet. More recently these write-offs against surplus have become popular for the opposite reason, viz., to eliminate future annual deductions from earnings and in that way to make the shares more “valuable.”

 

Example: Associated Gas and Electric Company charged against surplus in 1932 the sum of $5,892,000 for “debt discount and expense” written off.

 

This practice has aroused considerable criticism in recent years both from the New York Stock Exchange and from the S.E.C. As a result of these objections a number of companies have reversed their previous charge to surplus and are again charging amortization of bond discounts annually against earnings.

High dividend stocks – AGNC analysis of the income account> extraordinary losses> idle-plant expense

American Capital Agency Corp. (AGNC) does not own any plant equipment; therefore, they have no idle-plant expenses.  No adjustment to the income account is necessary for this category of analysis.  Learn more about how idle-plant expense accounting can effect earnings by reading the section below.

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The cost of carrying non-operating properties should almost always be charged against income account.  Idle-plant expenses are of a different nature than ordinary charges against income.  The idle-plant expenses should be of a temporary and therefore non-recurring type.  The company’s management can terminate the losses at any time by disposing of or abandoning the property.  If, for the time being, the company elects to spend money to carry these assets along in the expectation that future value will justify the outlay, it does not seem logical to consider these assets as equivalent to a permanent liability, i.e., as a permanent drag upon the company’s earning power, which makes the stock worth considerably less than it would be if these “assets” did not exist.

Some companies in the past had charged their idle-plant expenses to their surplus.  That relieved their reported earnings of expenditures that most companies charge against income.  They should have charged to their income account.

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