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Is American Capital Agency or ARMOUR Residential REIT the Better Dividend Stock For You?
 

Is American Capital Agency or ARMOUR Residential REIT the Better Dividend Stock For You?

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A comparison of two popular mortgage REITs

A comparison of two popular mortgage REITs

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    Is American Capital Agency or ARMOUR Residential REIT the Better Dividend Stock For You? Is American Capital Agency or ARMOUR Residential REIT the Better Dividend Stock For You? Presentation Transcript

    • Should you buy ARMOUR Residential REIT or American Capital Agency Corp?
    • First, some statistics • $70.5 billion in agency MBS • 7.6:1 leverage ratio • 11.1% dividend yield American Capital Agency Corp (AGNC) ARMOUR Residential REIT (ARR) • $16.5 billion in agency MBS • 8.12:1 leverage ratio • 13.9% dividend yield
    • Portfolio Composition • American Capital Agency’s portfolio is made up of a mix of agency-backed MBS – 48% of the portfolio is 15-year MBS – 46% is 30-year mortgages – The rest is made of hybrid adjustable-rate and 20-year mortgages as well as CMOs American Capital Agency Corp (AGNC) Data source: company investor presentation
    • Portfolio Composition • Like American Capital Agency, ARMOUR’s portfolio is made of fixed- rate, agency-backed MBS • However, almost all of the portfolio is made of 15- and 20-year mortgages ARMOUR Residential REIT (ARR) Data as of 3/31/14Source: ARMOUR’s 10Q
    • Profit margins • ARMOUR’s average yield from its assets is lower than American Capital Agency’s (3.19% vs. 3.5%) due to the lack of higher-paying 30-year mortgages in its portfolio • However, ARMOUR’s average net interest margin is higher (1.83% vs. 1.43%) • ARMOUR sold $5.6 billion in underperforming 25- and 30-year MBS during the quarter at a $303 million realized capital loss Source: ARMOUR’s Press Release
    • Why is ARMOUR’s dividend higher? • ARMOUR’s leverage is 8.12 to 1 • Average net interest margin is 1.82% • 8.12 times 1.82% = 14.78% • REITs have to pay 90% of their income • So, 90% of 14.78% is 13.3%, pretty close to ARMOUR’s yield
    • Where does American Capital Agency’s dividend come from? • AGNC’s leverage is 7.6 to 1 • Average net interest margin is 1.43% • 7.6 times 1.43% = 10.87% • REITs have to pay 90% of their income • 90% of 10.87% is 9.78%, • However, AGNC has other sources of income, like its $352 million worth of other mortgage REIT’s shares
    • The dividend frequency matters too! • American Capital Agency pays quarterly dividends, while ARMOUR has the advantage of monthly payments • Monthly dividends allow your returns to compound faster, producing a higher effective rate of return
    • Effective Annual Dividend Yield • A 11.1% dividend paid quarterly produces a 11.6% effective annual yield • Consider the growth of $1,000 at this rate for 30 years American Capital Agency
    • Effective Annual Dividend Yield • A 13.9% dividend paid monthly produces a 14.8% effective annual yield • As you can see, ARMOUR’s higher dividend could make a BIG difference over time ARMOUR Residential REIT
    • So, why would anyone choose American Capital Agency? • Management has shown it is willing to do whatever it takes to make money for its shareholders • The company aggressively bought back shares during 2013, when the stock was trading for up to 20% less than book value • AGNC bought back more than 10% of its shares in 2013 (ARMOUR issued more new shares than it purchased) • The company also purchased shares of rival mREITs which were trading at even deeper discounts
    • A lower dividend, but better results • Even though its dividend is lower, American Capital Agency has significantly outperformed ARMOUR so far in 2014 • AGNC earned a return on equity of 5.1% for the quarter (20.5% annualized) • $0.65 dividend plus $0.56 increase in book value • ARMOUR’s annualized ROE is 12.3%
    • A good lesson to learn • Just because one company pays a higher dividend doesn’t mean it will deliver the better results • American Capital Agency is not just focused on providing income, but looks to increase the net asset value per share • This will provide income and growth over the long run
    • Is this a better investment than mortgage REITs?