Jetta Productions Inc
It has 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 fulfill this wish.
AGNCP is one of 5 preferred shares of AGNC Investment (AGNC).
AGNC is a mortgage REIT that invests in agency MBS (mortgage-backed securities). The debt-to-equity ratio may seem high, but that’s perfectly normal for an agency mortgage REIT. Aside from interest rate risk, agency mortgages are quite safe. The company hedges much of the interest rate risk, so if there are large interest rate fluctuations, the loss is borne by common shareholders.
There is an exception to this statement.
Since four of the preferred stocks, including AGNCP, either have a variable dividend or will have a variable dividend by mid-year, From 2025 onwards, a reduction in short-term interest rates will mean a reduction in the dividend rate.
This part is kind of annoying, but it’s a necessary part of the “floating rate.” More specifically, it’s the interest rate and the part that’s floating. Basically, it’s the whole thing. That’s how these stocks work.
AGNCP will be the last of AGNC’s floating rate shares to pay a floating rate, beginning on or about April 15, 2025 (plus or minus one day).
Interest rates
I’ve argued that the Federal Reserve has raised interest rates far too much and that government debt will severely damage growth prospects for decades to come. I’ve even suggested that it might be morally wrong to tell young children that they were born with debt. Just imagine. What kind of madman thinks babies shouldn’t have debt?
Well, regardless, the Federal Reserve has raised interest rates significantly. But those higher rates have not only made the national debt an anchor for the next generation. They have also caused floating rate stocks to have significantly higher dividends. Even if short-term interest rates were to fall by 100 basis points, the yields on floating rate stocks would still be far higher than the dividend yields on fixed rate stocks of other preferred stocks with similar credit risk.
At present, investors must definitely expect falling short-term interest rates.
As a result, they must expect dividend rates to fall. The question is just how far the rates will fall.
We know that short-term interest rates can be below the rate of inflation because they literally have been for several years. If you are old enough to read the words in this article, then you lived through many of those years. If you are not old enough to read the words here, then my condolences on the national debt. Your parents can explain it to you if you are old enough to understand the concept of being born with debt.
Is AGNCP a good investment?
It’s OK. Not great. Not bad. It used to be great. Then the price went up. In the investing world, higher prices make buying things less attractive. Unless you’re following a momentum strategy, in which case you’d just buy things that were already up. Don’t ask me how, but in June 1994, momentum investing beat the S&P 500. Should you just buy preferred stock when the price was up? No. That’s a terrible idea. Preferred stock is somewhere between regular equity and debt. It doesn’t have the protections of debt, but it’s ranked above common stock. It typically has either a fixed or floating rate dividend. That’s different from the common stock of most mortgage REITs, which have a shrinking rate dividend. That’s a dividend that mostly just shrinks over time. It’s like growth, only in reverse.
Compare AGNCP with another stock
Sure, I need a few more words anyway.
AGNCM (AGNCM) is another preferred stock of AGNC.
AGNCM is already publicly traded 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 does not decrease (meaning short-term interest rates remain stable while the Federal Reserve stokes even more debt), then the dividend rate is about $0.24 higher than AGNCP’s fixed rate dividend.
With the share price differing by $1.00 and the dividend differing by about $0.24, it would take about 4 quarterly dividends for AGNCM to catch up to the benefit of an investor simply saving $1.00 by owning AGNCP.
With only 3 floating rate dividends, that won’t happen. Since 3 is less than 4, AGNCM won’t catch up before AGNCP starts floating.
What if they float?
AGNCP has a wider spread of 4.697% than AGNCM at 4.332%.
Consequently, AGNCP will pay a higher dividend.
Anyone who pays more for AGNCM than for AGNCP when both stocks are in circulation is simply mismanaging money and should not invest.
That’s OK. That description fits many people.
Therefore, at a share price range of $1.00, AGNCP is definitely better than AGNCM.
If you think AGNCM will make you more money today, you should try depositing money into a bank account and withdrawing it. The investor who dumps AGNCM to buy AGNCP can deposit $1.00 into the bank account. Withdraw the difference in the dividend amount every quarter. Congratulations, you have the same income. But with this strategy, you will still have some cash left at the end and then have a higher interest rate on AGNCP than the investors you dumped on AGNCM.
Okay, good article.
Have a nice weekend. Go play with your dog. If you read any other article it will definitely be less entertaining.
It’s like the saying in chess: “When you have checkmate in 1, look for a better solution.”
