Jetta Productions Inc
It’s been so long since there was an article about AGNCP (NASDAQ:AGNCP) that Seeking Alpha asked me to write an update.
Since you, my dear readers, deserve quality, I’m fulfilling that request.
AGNCP is one of 5 preferred shares from AGNC Investment (AGNC).
AGNC is a mortgage REIT investing in agency MBS (mortgage-backed securities). The debt to equity may seem high, but this is perfectly normal for an agency mortgage REIT. The agency mortgages are quite safe, aside from interest rate risk. The company hedges much of the interest rate risk. Consequently, when there is a big move in rates, the damage is absorbed by the common shareholders.
There is one exception to that statement.
Because four of the preferred shares, including AGNCP, either have a floating-rate dividend or will have a floating rate dividend by the middle of 2025, a reduction in short-term rates means a reduced dividend rate.
That part kind of stinks, but it’s a necessary part of “floating rate.” Specifically, it’s the rate and it’s the part that floats. Basically, it’s the whole thing. That’s how these shares work.
AGNCP will be the last of the floating-rate shares from AGNC to begin floating. It starts about 4/15/2025 (give or take one day).
Interest Rates
I’ve argued that the Federal Reserve raised rates far too high and the public debt is going to severely damage growth prospects for decades to come. I’ve even suggested that there could be something morally wrong with telling infants that they have been born into debt. Go figure. What kind of lunatic doesn’t think babies should have debt?
Well, regardless, the Federal Reserve did push rates much higher. Those higher rates have done more than compound the national debt into an anchor on the next generation, though. They also caused floating-rate shares to have much higher dividend rates. Even if short-term rates fell by 100 basis points, the floating-rate yields would still be far higher than fixed-rate dividend yields from other preferred shares with similar credit risk.
As it stands, investors should definitely be prepared for short-term rates to fall.
Consequently, they should expect these dividend rates to go down. The question is simply how far rates will fall.
We know it’s possible for short-term rates to be below the rate of inflation because that literally happened for several years. If you’re old enough to read the words in this article, then you lived through many of those years. If you’re not old enough to read the words here, then my condolences on the national debt. Your parents can explain it to you when you’re old enough to understand the concept of being born into debt.
Is AGNCP A Good Investment?
It’s okay. Not great. Not bad. It was great earlier. Then the price rallied. In the investing world, higher prices make purchasing things less attractive. Unless you follow a momentum strategy. In that case, you would just buy things that already went up. Don’t ask me how, but going back to June 1994 momentum investing beat the S&P 500. Should you just buy preferred shares after the price goes up? No. That’s an awful idea. Preferred shares are somewhere between regular equity and debt. They don’t have the protections of debt, but they do rank above common equity. They tend to either have a fixed-rate dividend or a floating-rate dividend. That’s different from common shares of most mortgage REITs which have a shrinking-rate dividend. That’s a dividend that mostly just shrinks over time. It’s like growing, but in reverse.
Compare AGNCP To Another Share
Sure, I need slightly more words anyway.
AGNCM (AGNCM) is another one of the preferred shares from AGNC.
AGNCM already floats and has a higher yield than AGNCP. However, AGNCP is $24.17 and AGNCM is $25.17. AGNCP only has 3 fixed-rate dividends left. If AGNCM’s dividend doesn’t decrease (meaning short-term rates are held steady as the Federal Reserve fans the debt even further), then the dividend rate is about $.24 higher than AGNCP’s fixed-rate dividend.
Since the share price is different by $1.00 and the dividend is different by about $.24, it would take about 4 quarterly dividends for AGNCM to catch up with the benefit of an investor who simply saves $1.00 by owning AGNCP instead.
With only 3 floating rate dividends, that won’t happen. Since 3 is smaller than 4, AGNCM won’t catch up before AGNCP begins floating.
What about when they are floating?
AGNCP has a bigger spread at 4.697% compared to AGNCM at 4.332%.
Consequently, AGNCP will have a bigger dividend.
Anyone who pays more for AGNCM than AGNCP when both shares are floating is simply bad with money and shouldn’t be investing.
That’s fine. Many people fit that description.
Consequently, AGNCP is definitively better than AGNCM given a $1.00 spread in the share price.
If you think AGNCM is giving you more money today, you should try putting money into a bank account and withdrawing it. The investor who dumps AGNCM to buy AGNCP can put $1.00 in the bank account. Withdraw the difference in the dividend amount every quarter. Congratulations, you have the same income. But with this strategy, you still have some cash left over at the end and then have a higher rate on AGNCP than the investors you ditched in AGNCM.
Okay, good article.
Have a good weekend. Go play with your dog. If you read another article, it will be definitively less entertaining.
It’s like the saying in Chess: “When you have mate in 1, look for better”.
