AGNC Investment Corp. (AGNC – Free Report) not only witnessed year-over-year growth in net spread and dollar roll income (excluding estimated catch-up premium amortization costs) in the last reported quarter but has also been witnessing upward estimate revisions, reflecting analysts’ optimism about its prospects. Notably, the Zacks Consensus Estimate for its 2020 earnings has improved 3.6% over the past month.
Shares of this Zacks Rank #2 (Buy) company have declined 10.3% over the past year, which is narrower than the industry’s fall of 25.2%.
AGNC Investment has a VGM Score of B. Our research shows that stocks with a VGM Score of A or B, when combined with a Zacks Rank #1 or 2, offer the best investment opportunities for investors.
Notably, the company has a number of other aspects that make it a solid investment choice.
Strategic portfolio construction aids: Over the recent quarters, AGNC Investment has made pronounced efforts to reposition its portfolio to offset risks related to interest rates and prepayment uncertainty. In fact, it reduced holdings in generic higher-coupon MBS, while adding lower coupon ones. Since lower coupon MBS are benefitting from Fed relief efforts and dollar roll specialness, and have limited prepayment risks, the move seems a strategic fit and will likely enhance AGNC Investment’s valuation gains.
Moreover, the company continued its higher-coupon specified-pool MBS strategy that in the current scenario offers greater stability of cash flows and favorable prepayment characteristics as compared with generic Agency MBS. Such prudent capital-allocation efforts also bode well for long-term growth.
Favorable ROE: AGNC Investment’s return on equity is 16.3% compared with the industry’s average of 8.7%. This reflects that the company reinvests its funds more efficiently.
Lower leverage: Furthermore, its low leverage as compared to the industry makes it a safe bet. It has a total debt to total equity ratio of 0.02, lower than the industry’s average of 1.50. This reflects that it has a lower debt burden relative to its peers and will likely be able to fare well even in a dynamic business environment.
Moreover, AGNC Investment has solid access to attractive funding across a broad spectrum of counterparties and financing conditions. As a result, it has high financial flexibility, which supports the company’s growth pursuits and opportunistic enhancement of its portfolio.
Lower repo rates to drive spreads: Notably, Fed’s open market operations offered stability in the repo market for Agency MBS. Moreover, robust demand for high-quality collateral like Agency MBS resulted in significant repricing in the repo market. Consequently, the company witnessed a sequential decline of 36 basis points (bps) in average Agency repo costs to 0.40% in the third quarter. Such a reduction in costs of funds is driving growth in net interest spread.
Other Stocks to Consider
Annaly Capital Management, Inc.’s (NLY – Free Report) Zacks Consensus Estimate for 2020 earnings has been revised 2.8% upward to $1.09 over the past week. The company currently carries a Zacks Rank of 2.
Starwood Property Trust, Inc.’s (STWD – Free Report) earnings estimates for the ongoing year have been revised 2.6% upward to $1.97 over the past month. The company currently carries a Zacks Rank of 2.
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