9.15% Dividend Yield From AGNC Gets Closer To A Buy (NASDAQ:AGNCN)

AGNC Investment Corp. (AGNC) has several preferred shares we’ve covered over the years. Just recently, we wrote an article explaining why we thought every preferred share from AGNC was overpriced.

They were.

Today, we’re taking a look at one of those preferred shares: AGNCN (AGNCN).

We’re not upgrading AGNCN to a buy, but we did upgrade it from overpriced to hold. The price has declined enough (adjusted for dividend accrual) that investors looking for a relatively low-risk preferred share with a yield over 9% should keep an eye on this one.

We don’t believe AGNCN is cheap enough yet, but it is getting close enough to be interesting.

AGNCN Gets Closer To A Buy

When we wrote our prior article on the AGNC preferred shares about a month ago, AGNCN was trading around 102.7% of our buy target. The valuation looks better today:

AGNCN recently traded around $25.83.

Our price targets (using $.45 of dividend accrual) are:

• Strong Buy under $24.39

• Buy under $25.42

• Overpriced above $25.86

AGNCN is at roughly 101.6% of our buy target.

It’s still a hold. However, that’s a material difference compared to saying “this preferred share is overpriced”.

We’re not going to move the target to a buy because the market price is getting closer to our buy range. That’s not how price targets work. We are going to keep an eye on it.

Things To Like About AGNCN

There are a couple things we like about AGNCN.

• It carries a risk rating of 2 out of 5. That makes it one of the lower-risk preferred shares we cover.

• The stripped yield is currently around 9.15%. That’s a nice yield for a preferred share carrying a risk rating of 2.

We’ve recently covered some other preferred shares to demonstrate just how important it is to look at more than the dividend yield.

For instance, we recently covered CHMI-A (CHMI.PR.A). CHMI-A offered a high yield while carrying significant risk. We also covered NLY-I (NLY.PR.I) recently. NLY-I is an example of a relatively low-risk preferred share we cover that is also worth keeping an eye on.

We don’t just sort our preferred shares by dividend yield and buy whatever suddenly appears at the top.

That would make this job much easier.

It would also make us worse investors.

Floating Rate

AGNCN has already gone to a floating rate:

The floating spread is 5.111%.

At recent rates, that produces a stripped yield around 9.15%. That’s pretty attractive, especially given the risk rating. In fact, that 5.111% spread is one of the characteristics we really like about AGNCN. In our prior AGNC preferred share article linked earlier, we pointed out that AGNCN had the best floating spread among all the preferred shares issued by AGNC. The problem wasn’t the size of the floating spread. It was the price. That’s a distinction we want investors to understand. A great preferred share can be a bad investment if purchased at the wrong price. On that note, a preferred share can become attractive if the price drops low enough. That’s why we have price targets.

Call Risk

There’s one significant issue. AGNCN is callable. Shares are trading above the $25.00 call value and have an annualized yield to call of negative 12.7%. Keep in mind there is some dividend accrual. You can subtract the dividend accrual from the recent price to get the stripped price which is a materially better measurement for how much you’re paying over the call value.

If we’re paying more than $25.00 for a preferred share that can be called at $25.00, we need to account for that risk.

This was one of the major reasons we preferred AGNCO over AGNCN in our prior article. At the time, AGNCN had the better stripped yield and the better floating spread. However, it also had significantly more call risk. Today, the lower stripped price gives us a better annualized yield to call.

Still not good enough for a buy.

But better.

Relative Valuation

We spend a great deal of time comparing preferred shares at The REIT Forum. We recently wrote a guide on swapping preferred shares. If readers are interested, we also had a post on our most recent 100 trades in the preferred share and baby bond space. This goes to show that it is quite common for there to be an opportunity in the preferred shares of mortgage REITs. Investors don’t need to take on significant risk by investing in the common stocks.

That’s also why we’re happy to write about a preferred share that is still in our hold range.

At $25.83, AGNCN is only $0.41 above our buy-under target. If the price continues to drop without a material change in the fundamentals, AGNCN could suddenly drop into our buy range.

Final Thoughts

AGNCN is moving on our radar. Shares offer:

• A stripped yield around 9.15%

• A floating spread of 5.111%

• A risk rating of only 2 out of 5 (that’s good, lower is better)

Those are attractive characteristics. The valuation is the last piece of the puzzle.

Consequently, we’re not pounding the table and telling investors to buy AGNCN today.

We’re telling them to watch it.

There’s a difference.

A month ago, AGNC’s preferred shares were easy for us to ignore because they were in our overpriced range. AGNCN has now declined enough to be on our radar.