With a 13% Yield but an Uncertain Interest Rate Environment, Is AGNC Stock a Buy?

With a yield of over 13%, AGNC Investment (NASDAQ: AGNC) is a stock that frequently pops up on dividend investors' radars. For those unfamiliar with AGNC, it is a mortgage real estate investment trust (mREIT) that owns a portfolio of agency mortgage-backed securities (MBS). Since these bonds are backed by government agencies, they carry essentially no default risk. However, the value of MBS can be greatly affected by movements in mortgage spreads and interest rates, and with the Fed now considering an interest rate hike rather than a cut, the environment has suddenly changed for AGNC.

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While AGNC noted the sudden shift in rate expectations with a new Fed chief, it believes the supply of new mortgages will be materially lower this year, while demand for MBS should remain high. As such, it thinks spreads can remain within 120 to 160 basis points of Treasuries and perhaps even tighten. Lower spread volatility is generally good for AGNC and can allow it to invest with more leverage.

Meanwhile, AGNC continues to generate strong net spread and dollar roll income (dollar roll is a hedging strategy used in MBS markets to avoid losses when MBS values decline), which is used to cover its dividend. For Q2, this came in at $0.40 per share, while it paid $0.36 per share in dividends. That was an increase from $0.38 a year ago. Its net interest spread was basically unchanged at 2%, as was its at-risk leverage of 7.4 times.

AGNC's tangible book value (TBV) also rose in the quarter, increasing by $0.20 per share to $8.58 at the end of Q2, up from $8.38 at the end of Q1. TBV is the value of AGNC's MBS portfolio, and it is the metric by which mREITs are normally valued. It said that as of the end of last week, its TBV was down about 1%, or a little less than 2% when accounting for its monthly dividend accrual.

Should investors hold the stock?

Mortgage REITs are always trying to balance the impact of mortgage rates, spreads over Treasuries, prepayments, and a host of other factors. AGNC management has done a solid job of this over the past couple of years, especially in generating solid income to cover its robust dividend.

Right now, the stock looks like it will continue to be a solid income generator. However, unless spreads tighten significantly, I don't see much additional upside beyond its current dividend payout, given that the stock trades well above its TBV per share.

Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.