Increased Profits with Enhanced Risk: Earnings Reaching Up To 15%
In the realm of Mortgage-Backed Security (MBS) investments, two notable players stand out: AGNC Investment Corporation (AGNC) and ARMOUR Residential REIT (ARR). Let's delve into the key points that make these companies unique and help investors make informed decisions.
AGNC's Q1 tangible book value dipped to $7.81 per share, representing a 5.4% decline from the previous quarter. However, the company has shown resilience, stepping up as a buyer in Q2, adding an additional $3 billion in assets. Despite a slight dip in earnings to $0.38 per share in the recent quarter, AGNC's share price has traded at a substantial premium to its Net Asset Value (NAV), allowing it to issue equity freely.
On the other hand, ARR presents a different picture. The company's stock price volatility is higher (4.54%) than AGNC (4.17%), indicating a somewhat riskier price fluctuation. The Sharpe ratio, a measure of risk-adjusted returns, is negative for ARR (-0.16) but positive for AGNC (0.35), suggesting AGNC has historically delivered better risk-adjusted performance.
Both companies primarily invest in agency MBS backed by US government-sponsored entities, ensuring low credit risk. However, their interest rate sensitivity is high due to their fixed income nature and leverage. ARR uses higher leverage, mostly funded through short-term repurchase agreements (repos), which exposes it to interest rate mismatches and funding risk, contributing to potentially more volatile earnings and dividend cuts.
AGNC, despite a high dividend yield (~15%), appears to have a somewhat more stable dividend and capital base, with lower leverage risks compared to ARR. The low correlation (0.36) between AGNC and ARR’s stock prices indicates that combining them could aid diversification in a portfolio.
ARR offers a higher yield but comes with more return volatility, dividend risk, and sensitivity to short-term funding and interest rate changes. Your choice depends on your risk tolerance and income needs within the MBS REIT sector. For deeper analysis, tools like PortfoliosLab stock comparison, firm fundamentals on Danelfin, and dividend safety reviews from Simply Safe Dividends and Sure Dividend are helpful.
It's essential to note that the MBS sector is considered extremely low-risk due to government guarantee, especially on agency MBS. Variation in AGNC's earnings is expected due to maturities of swaps taken out in 2020-2021. ARR's common equity returns are compared to Dynex Capital (DX) in the current market.
ARR's management has a history of issuing shares when trading at a premium and buying back shares when trading at a discount. ARMOUR Residential REIT (ARR) primarily invests in MBS and Treasury notes, while AGNC Investment Corporation (AGNC) is a mortgage REIT that invests primarily in MBS and utilizes leverage to boost returns.
In the case of ARR, the 7.00% Series C Cumulative Redeemable Preferred Stock (ARR.PR.C) offers an 8% yield. Interestingly, ARR.PR.C's dividend remains covered even if common shares are not providing strong total returns. Management of AGNC noted that book value was 7.5%-8% lower as of April 21st, implying a book value of $7.59-$7.63.
In conclusion, while both companies offer unique advantages, understanding your risk tolerance and income needs is crucial when deciding between AGNC and ARR for MBS exposure. For a comprehensive analysis, it's recommended to utilise various financial tools and resources.
- The government's guarantee on agency MBS investments, such as those invested by both AGNC and ARR, contributes to the low-risk nature of the MBS sector.
- A diversified portfolio might benefit from the low correlation between AGNC and ARR’s stock prices, suggesting that combining these two companies could provide increased portfolio stability.
- Finance experts suggest considering risk tolerance and income needs when choosing between AGNC and ARR for investing in the MBS REIT sector; for example, ARR provides a higher yield but comes with more return volatility and dividend risk.
