AGNC Investment: 10% Yield On AGNCN Preferreds Going To Shrink

Summary:

• AGNCN offers a floating rate yield of about 10.3%, but future dividends should be lower due to the recent cut by the Federal Reserve.
• AGNCO is a better deal than AGNCN, with a similar floating spread and a lower stripped price, reducing call risk and simply offering more cash in the pocket.
• The primary risk factor for AGNC’s preferred shares is the path of future interest rates. Recession fears can become relevant if they’re significant.
• I’m neutral on AGNCN at current prices but see AGNCO as a superior investment due to its more favorable pricing.

AGNC Investment Corp. (NASDAQ:AGNC) has five preferred shares.

In this article, we’re going to take a look at AGNC Investment Corp. CUM 1/1000 7% C (AGNCN).

We will need to provide a few comparisons for the shares as well. It doesn’t make much sense to evaluate one preferred share without looking at other preferred shares from the same company.

AGNCN

AGNCN was a fixed-to-floating preferred share. It already transitioned to a floating rate.

Shares are paying 3-month SOFR + 0.26161% (the adjustment since they initially used LIBOR) + 5.1111%.

The result is a pretty nice yield. At the moment, it comes out to about 10.3% using the upcoming dividend. I expect shares to go ex-dividend on 10/01/2024.

However, after this dividend, the rate should drop. The new lower rate reflects the Federal Reserve reducing the Fed Funds target rate. Specifically, we’re looking at SOFR, but that will generally track the predicted next three months of the Fed Funds target rate pretty well.

It already includes a bit of a bigger discount to reflect additional potential cuts over the next three months.

Is It A Good Deal?

Shares are $25.80. That’s not a particularly good or bad price. Shares have about $.61 in dividend accrual so far, so the stripped price is about $25.19.

That’s high enough to create a little bit of call risk, but not a huge amount. If shares were called immediately after the market closed, the investor would have a small loss. The accrual while waiting for the call to be finalized would offset much of the $.19 from paying a stripped price above $25.00.

However, if I were investing in the shares right now, I would prefer AGNC Investment Corp. 6.5% DP SH PFD E (AGNCO).

AGNCO has a very similar floating spread at 4.993%.

Shares have one more fixed dividend left. They’ve accrued about $.38 so far towards that dividend.

However, AGNCO only costs $25.30.

Consequently, investors get a striped price that is about $.08 below the $25.00 call value.

Since the floating rates will be so similar, I think AGNCO is a better deal than AGNCN.

The Big Factor

There’s one more big factor investors will need to consider.

How do you feel about interest rates?

If you expect the Federal Reserve to keep cutting until rates are around 1% or even lower, then you shouldn’t be interested in the floating-rate shares.

On the other hand, if you think the Federal Reserve will really drag the cuts out over several years, then these shares look pretty attractive.

Overall, I don’t like to bet heavily on the direction of rates. Of course, being a REIT analyst, I still end up with quite a bit of rate sensitivity.

That’s just the way REITs get impacted by interest rates.

Safety

AGNC’s preferred shares should generally be pretty stable. The company “has a lot of debt,” but that’s completely normal for an agency mortgage REIT. The assets they hold are exceptionally high quality, so they don’t have to worry about homeowners who default. The biggest risk on the assets (agency mortgage-backed securities) is the interest rate risk. The mortgages are fixed-rate mortgages, so if rates go higher, the value goes down. The mortgage REITs handle that by hedging heavily against moves in interest rates.

I’m not particularly concerned about AGNC’s preferred shares, so the biggest risk factor here is simply the path of future interest rates.

If we get into a recession, credit spreads widen and that would probably send share prices down. The amount they fell would depend on the severity of the recession, though. OK, if you want to get more precise, it would depend on the severity of the fear around the recession. A relatively minor recessionary scare shouldn’t have much impact. Historically, we’ve needed to see spreads widen out quite a bit before it impacted AGNCN by more than 2%.

Conclusion

I’m taking a neutral stance on the shares here. I would need a bit of a lower price before I would be willing to open a position. However, we’ve seen the stripped price go quite a bit higher, so investors looking for top dollar to close a position could look for a bit more. Yet, the thing that stands out to me is that AGNCO still offers a superior deal. It’s a lower first dividend, but the difference is much smaller than the $.50 difference in the share prices.

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Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

I own several preferred shares, but none of the ones I've discussed in this article.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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