AGNC Investment Corp. (AGNC) is in the spotlight as the Federal Reserve prepares to begin cutting interest rates this month. The Fed has maintained its benchmark lending rate at its highest level since 2001, at 5.25-5.50%, in an effort to curb inflation. While inflation has been gradually easing, the Fed’s recent statement signaling a shift in policy has ignited optimism among investors. Market participants are now predicting a 61% chance of a 50 basis point rate cut this month, a significant increase from the 26% chance predicted just a month ago.
AGNC, like many other mREITs, has struggled in the higher-interest-rate environment. However, the potential for a rate cut has sparked renewed interest in the company’s stock. Over the past six months, AGNC shares have rallied 15.5%, outperforming the industry’s average growth of 6%. The stock is also trading above its 50-day moving average, indicating a positive trend.
How Rate Cuts Benefit AGNC
AGNC’s financial performance has been negatively impacted since the Fed began raising interest rates in early 2022. The company’s investment capacity to sustain its high-yielding payments has been a source of concern. However, the expected rate cuts could provide a much-needed boost.
Falling long-term bond yields, a direct result of the Fed’s decision to lower interest rates, have led to a decline in mortgage rates. The average rate on the 30-year fixed-rate mortgage has dropped to 6.35% as of August 29, down from 6.46% a week earlier. A year ago, the rate averaged 7.18%.
As rates continue to decline, AGNC’s net interest spread is likely to improve. This will help ease the pressure on the company’s earnings, which have been weighed down by high funding costs. It will also allow AGNC to potentially increase its dividend payout.
AGNC’s liquidity position, with $5.3 billion in cash and unencumbered assets as of June 30, 2024, should alleviate concerns about its ability to maintain its dividend payments.
AGNC’s Impressive Payout
AGNC’s dividend yield currently stands at 14.01%, significantly higher than the industry average of 11.2%. This makes the company attractive to income-seeking investors. The company has a history of paying monthly dividends, and the expected rate cuts are likely to support continued dividend payments.
AGNC also has a share repurchase plan in place. While there were no repurchases in 2023 and the first half of 2024, the company still has $1 billion remaining under the program for repurchase through December 31, 2024. This plan allows AGNC to capitalize on stock price volatility and enhance shareholder value.
Factors to Consider
While AGNC’s high dividend yield and regular payouts are enticing, investors should consider several factors before investing.
In April 2020, AGNC slashed its dividend to 12 cents per share from 16 cents. The company has a history of cutting dividends during challenging periods. Furthermore, AGNC’s performance is susceptible to volatility in the mortgage market, changes in the yield curve, interest-rate fluctuations, and broader financial conditions.
Analysts appear bearish about AGNC, and the Zacks Consensus Estimate for 2024 and 2025 earnings has been revised downward in the past 60 days.
Valuation
From a valuation standpoint, AGNC appears expensive relative to its peers. The company is currently trading at a forward 12-month Price-to-Tangible Book (P/TB) multiple of 1.16X, above the industry average of 0.99X.
Should You Invest in AGNC Now?
The Fed’s shift in monetary policy is likely to benefit AGNC. A rate-cutting cycle could boost the company’s net interest spread and book value, creating positive momentum. However, investors should remain aware of the potential for volatility in the mortgage market and the company’s history of dividend cuts.
Given its premium valuation and the uncertainties surrounding the market, investors may want to wait for a more favorable entry point before investing in AGNC. Careful analysis of upcoming interest rate changes and market volatility is essential before making a decision.
