Dividend sustainability is always a concern for higher-yielding stocks. Many of these companies have such high yields because investors worry about how long they can maintain their payouts, compressing the value of the stock price.
AGNC Investment (NASDAQ: AGNC) has maintained its monster dividend (14.5% current yield) for 58 months in a row. The mortgage-focused real estate investment trust (REIT) believes that streak will continue. Here’s what drives that view.
Mortgage REITs are complex entities. They typically invest in real estate debt on a leveraged basis (i.e., using debt to increase their investment). They seek to capitalize on the spread between short-term and long-term rates (they borrow at lower short-term rates to invest in higher-yielding, longer-duration debt securities). These REITs also often seek to hedge their interest rate exposure.
These financial arrangements can cloud a mortgage REIT’s financial results, making it difficult to determine if it can afford its dividend.
For example, last quarter, AGNC Investment reported a comprehensive loss of $0.11 per share, which included $0.10 of net income and a loss of $0.20 per share related to mark-to-market changes in its investment portfolio. With its monthly dividend payments adding up to $0.36 per share in the quarter, it would seem at first glance that the REIT’s high-yielding payout is in trouble.
The company’s full-year numbers weren’t any better. Its comprehensive income was $0.84 per share. That was well below the $1.44 per share it paid in dividends last year.
CEO Peter Federico discussed the dividend on the fourth-quarter conference call on Jan. 28. He stated, “We don’t want investors to look at [our earnings measures] as a driver of our dividend policy because it is not.” He noted that those numbers are a “reflection of current period earnings, not the long-run earnings of our portfolio.”
Instead, he noted that the company looks “at the economics of our portfolio from a dividend perspective.” It aims to align the dividend with the returns its portfolio can produce over the long term.
Federico highlighted that one factor the company looks at is its return on equity (ROE) on a go-forward basis. That metric must align with its total cost of capital, which includes the cost to run its business and pay its common stock dividend and preferred stock dividend, as well as its operating expenses. The CEO noted that the current return hurdle rate based on its expenses was 16.7% at the end of the fourth quarter. That means it needs to generate a return above that level to afford its current dividend.
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