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.

High dividend stocks - Words before we begin analyzing AGNC's earnings

In my last post I covered American Agency Capital Corp.’s (AGNC) dividend rate and record.  You can read that post and catch up on my analysis of AGNC by clicking here: http://tinyurl.com/3624qch.

 

Words before we start our analysis of the income account – copied extensively from Security Analysis chapter 31.

I recommend that you value AGNC [and any company for that matter] as you would if you were going to purchase the entire company in a private transaction.

 

Given sufficient information you shouldn’t go astray in your valuation of AGNC.  Their 2009 annual report, most recent 10-K filing with the SEC, and earnings conference call audio recordings should contain the information necessary for analysis of AGNC’s business.

 

You should arrive at intrinsic values similar to that which bankers evaluating the credit worthiness of the enterprise would arrive at.  Basically, I’m saying that you should analyze both corporate earnings and the corporation’s assets (balance sheet).  We should not rely on a single earnings test to determine if an investment in AGNC it prudent.  A single earnings test would be less dependable than the two fold earnings and balance sheet tests.   Earnings statements are subject to more rapid and radical changes than the changes which occur on a balance sheet.

 

Lastly, earnings statements can be more misleading in their presentation by company management and can contain more mistaken inferences than the typical balance sheet when scrutinized by an experienced investor.

 

Keep in mind as we begin the analysis of the earnings statement that the meaning of AGNC’s income statement cannot be properly understood without reference to the balance sheet at the beginning and end of the earnings period.

 

Here is a simplified statement of Wall Street’s method of appraising common stocks:

1.       Find out what the stock is earning.  (This usually means the earnings per share as shown in the last report.)  AGNC earned $1.23 per share in the most recent quarter.

2.       Multiply these per-share-earnings by some suitable “coefficient of quality” which will reflect:

a.       The dividend rate and record.

b.      The standing of the company – its size, reputation, financial position, and prospects.

c.       The type of business (e.g., a technology company will sell at a higher multiple of earnings than a slow growth consumer staples manufacturer).

d.      The temper of the general market.  (Bull market multipliers are larger than those used in bear markets.)

 

The foregoing may be summarized in the following formula:

 

Price = current earnings per share X quality coefficient.

 

Current price ($26.98) = current EPS last four quarters ($6.97) X quality coefficient (3.87)

 

Graham’s “quality coefficient” is commonly known as “price/earnings ratio” today.

 

The result of this procedure is that in most cases the “earnings per share” have attained a weight in determining value that is equivalent to the weight of all the other factors taken together.  The truth of this is evident if it be remembered that the “quality coefficient” is itself largely determined by the earnings trend, which in turn is taken from the stated earnings over a period.

 

AGNC’s earnings not only fluctuate, but they are subject to arbitrary determination by the company’s management.  It will be illuminating if I summarize at this point the various devices, legitimate or otherwise, by which per-share earnings may at the choice of those in control be made to appear either larger or smaller.

1.       By allocating items to surplus (retained earnings) instead of to income, or vice versa.

2.       By over-or understating amortization and other reverse charges.

3.       By varying the capital structure, as between senior securities and common stock.

4.       By the use made of large capital funds not employed in the conduct of the business.

 

I don’t know if AGNC’s management has manipulated any of their earnings statements yet.  We will discover that as I perform analysis on AGNC’s income statements in upcoming posts.

 

Significance of the foregoing to the analyst and to you

These intricacies of corporate accounting and financial policies undoubtedly provide a broad field for the activities of the securities analyst (that’s me).  There are unbounded opportunities for shrewd detective work, for critical comparisons, for discovering and pointing out a state of affairs quite different from that indicated by the publicized “per-share earnings”.

 

That this work may be of exceeding value cannot be denied.  In a number of cases it will lead to a convincing conclusion that the market price for AGNC is far out of line with intrinsic or comparative worth and hence to profitable action based upon this sound foundation.  But it is necessary to caution the analyst against over confidence in the practical utility of my findings [Graham is warning me].  It is always good to know the truth, but it may not always be wise to act upon it, particularly on Wall Street.  And it must be remembered that the truth that I uncover if first of all not the whole truth and, secondly, not the immutable truth.  The result of my study is only a more nearly correct version of the past.  My information may have lost its relevance by the time I acquire it, or in any event by the time the market place is finally ready to respond to it.

 

With full allowance for these pitfalls, it goes without saying, nonetheless, that security analysis must devote thoroughgoing study to AGNC’s corporate income accounts.  It will aid in our exposition if we classify this study under three headings:

1.       The accounting aspect.  Leading question: What are the true earnings of AGNC for the period studied?

2.       The business aspect.  Leading question: What indications does AGNC’s earnings record carry as to the future earning power of the company?

3.       The aspect of investment finance.  Leading question: What elements in AGNC’s earnings exhibit must be taken into account, and what standards followed, in endeavoring to arrive at a reasonable valuation of the shares?

 

Read all about my valuation of AGNC and other topics affecting your investment portfolio at www.myhighdividendstocks.com

 

Be seeing you!

High dividend stocks - American Capital Agency Corp. (AGNC) dividend record

 

August 20th, 2010

 American Capital Agency Corp.  (Public, NASDAQ:AGNC) often appears at the top of high dividend yield lists.  I'll bet you are wondering if its 20.76% dividend yield will last or whether to add it to your best dividend stocks portfolio.  To satisfy your curiosity I'm going to use Benjamin Graham's security analysis methods over the next few days or perhaps weeks to value AGNC.

My valuation of AGNC will be divided up into three parts:
  1. The dividend rate and record
  2. Income-account factors (earning power)
  3. Balance-sheet factors (asset value) 
Here is the company description from Google Finance, "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."

So it is a real estate investment trust.  I'll delve into how exactly they make their income in part II of this analysis.  REIT must pay 90% of their taxable income to shareholders.  Taxable income is usually lower that total income.  That's why you'll see dividend payout ratios in the 70% range below in the dividend record section of this post.

Oh yeah, I almost forgot.  This company went public in mid-2008 so there is only two years of dividend history to examine.  Let's get right to it.  All the dividend information came out of the company's 2009 annual report and its most recent 10-K filing for the period ending June 30th, 2010.

DIVIDEND RATE
Dividend: $1.40 per quarter
Dividend yield: 20.76% annualized

Now that is a huge dividend!!  You could make 4-6% in just one quarter.  The heavy analysis on whether that dividend is sustainable will come later, but for now let's just stare at that huge yield for a moment.  Are people just bypassing this stock because it looks too good to be true?  AGNC has paid a $1.40 dividend per quarter for the last four quarters.
 
DIVIDEND RECORD
Agnc_dividend_record_as_of_201
I wouldn't get to concerned with the dividend increases and dividend cuts here because REIT have to payout at least 90% of their taxable income as dividends.  Other companies that don't have that requirement have more freedom to payout very little and make puny increases.  When one of those companies cuts its dividend it is more indicative of possible earnings problems.

The only thing that worries me about AGNC's dividend record is the 114% payout ratio this past quarter.  You can see that in the 4th quarter of 2008 the payout ratio reached 164%.  The company cut the dividend from $1.20 to $0.85, but they can't cut too much otherwise they won't qualify as a REIT.  Therefore, the real analysis must focus on the earning power of the company.  The question is what is AGNC going to earn in the 3rd and 4th quarter of 2010?  If we can deduce that, then we'll have a better idea of where the yield is heading.  We can be fairly certain that the dividend payout ratio will return to the 70-80% range.

Here is some basic info on AGNC that I'll start with in my next post at My High Dividend Stocks Blog regarding AGNC's earning power.

Today's closing price: $26.98 -0.02 (-0.07%) 
Today’s range: $26.91 - $27.15
Volume: 753,524.00
Average volume: 673,000

 Mkt cap: 908.15M
P/E: 3.87
EPS: $6.97
Shares: 33.66M

 52 week range $23.41 - $31.42

High Dividend Stocks - Safeguarding against the loss of purchasing power

Why are you contemplating investing in high dividend stocks?  I consider high dividend stocks those yielding over 6%.  One reason could be that you want your dividends to outpace so-called "inflation".

What metric best measures the loss of your money's purchasing power at the hands of the Federal Reserve?

If you ask people at work and on the street how much prices go per year on average, then you are likely to get the answer 3-4% per year from 80% of them.

As horrendous as annual consumer price increases of 3-4% are...the story doesn't end there.  You've had this nagging feeling your whole adult life that the prices you pay for shelter, food, energy, healthcare, utilities, and entertainment add up to a whole lot more that 3-4%.  Well, you were right and a gentleman named John Williams over at www.shadowstats.com can confirm you hunches with actual numbers (http://www.shadowstats.com/alternate_data/inflation-charts).

You see, the consumer price index (CPI) is a collossal lie to put off the day of reckoning for Social Security, Medicare, and a myriad of pensions.  These ponzi schemes and underfunded pensions go broke faster when consumer prices rise.  Past presidential administrations convinced the Bureau of Labor Statistics to modify the methods of computing the CPI in order to kick the bankrupcy can beyond their presidency.  You can read about how they changed the computations at ShadowStats.com.

The bottom line is that actual real life consumer price increases are several percentage points above what the government reports.  Right now, according to ShadowStats.com the rate of consumer price increases of a representative sample of goods is about 8%.

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Now do you understand why I think you need to investing in high dividend stocks yielding more than 6% with earning power and strong balance sheets.  The earning power and strong balance sheets ensure the dividend and provides an opportunity for capital appreciation in the market price in your stock.

There will be many choice stocks yielding over 6% when this bear market rally finally fizziles.  Be patient, save your capital, and get ready to buy when everyone else is fearful (think of the fear below the March 2009 lows).