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

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

  1. 1. Should you buy ARMOUR Residential REIT or American Capital Agency Corp?
  2. 2. 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
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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
  10. 10. 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
  11. 11. 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
  12. 12. 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%
  13. 13. 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
  14. 14. Is this a better investment than mortgage REITs?