This year started as the best of times for AGNC Investment (AGNC +1.30%). Several positive catalysts in January and February drove strong performances for mortgage-backed securities (MBS) during that period. However, the start of the war with Iran in March caused some headwinds for the real estate investment trust (REIT) that month, which has continued into April.
Here’s a look at whether this shift puts the mortgage REIT‘s high-yielding monthly dividend (currently over 13%) at risk of a reduction.
Image source: Getty Images.
It was the best of times and then the worst of times
The Trump Administration began the year focused on improving the housing market. That helped reduce interest rate volatility, maintain mortgage spread stability, and improve housing affordability. It also helped drive strong performance across most fixed income investments in January and February, especially Agency MBS (pools of residential mortgages guaranteed against credit losses by government agencies such as Fannie Mae). As the leading investor in Agency MBS, AGNC Investment benefited from these market conditions.
Unfortunately, those robust market conditions came to an abrupt halt in March when the U.S. and Israel launched attacks against Iran, which retaliated by attacking energy targets throughout the Middle East, effectively closing the Strait of Hormuz. The war drove volatility higher and investor sentiment lower. As a result, Agency MBS spreads widened, causing AGNC to generate a negative economic return of 1.6% in the quarter due to a $0.50-per-share decrease in the tangible book value of its stock. The REIT also reported a comprehensive loss of $0.18 per share.
Today’s Change
(1.30%) $0.14
Current Price
$10.91
Key Data Points
Market Cap
$12B
Day’s Range
$10.81 – $11.12
52wk Range
$8.52 – $12.19
Volume
152K
Avg Vol
21M
Gross Margin
100.00%
Dividend Yield
13.20%
Prepared for whatever comes next
The first quarter didn’t end well, and those more challenging conditions have persisted into the second quarter due to uncertainty over peace talks with Iran. However, AGNC remains optimistic despite the current challenges. CEO Peter Federico commented in the first-quarter earnings press release that, “We continue to believe that many of the factors we cited at the beginning of the year remain positive catalysts for Agency MBS performance.” As a result, the company believes that “with some form of resolution or easing of tensions in the Middle East, these factors could quickly revert to positive catalysts for Agency MBS.”
That drives the company’s long-term outlook that Agency MBS remain strong investment despite the near-term challenges posed by the war. Further, the company is in a strong position to capitalize on these favorable conditions when they return. It had a significant liquidity position of $7 billion in cash and Agency MBS at the end of the quarter.
However, all this assumes there’s a quick resolution to the war and a return to normal market conditions. That’s not a guarantee, as even the ceasefire hasn’t reopened the Strait of Hormuz, which is crucial to keeping a lid on inflation to support lower interest rates in the future. If the war resumes and further disrupts global energy supplies, it heightens the risk of a recession and potential credit market issues. If conditions deteriorate significantly, AGNC might need to reset its dividend, as it did in 2020 during the pandemic.
A heightened risk of a reduction
While this year started great for AGNC, conditions have deteriorated due to the war. If the U.S. secures a peace deal with Iran, the market could go back to where it was earlier in the year, easing the risk that AGNC would need to reduce its dividend. However, a resumption of the war could worsen conditions in the Agency MBS market. That near-term uncertainty increases the risk of a dividend reduction for AGNC, which income-focused investors need to watch closely in the coming months.
