Dear Valued Visitor,

We have noticed that you are using an ad blocker software.

Although advertisements on the web pages may degrade your experience, our business certainly depends on them and we can only keep providing you high-quality research based articles as long as we can display ads on our pages.

To view this article, you can disable your ad blocker and refresh this page or simply login.

We only allow registered users to use ad blockers. You can sign up for free by clicking here or you can login if you are already a member.

American Capital Agency Corp. (AGNC), CYS Investments Inc (CYS): What Does the Dividend Hike For This Agency mREIT Mean?

Page 1 of 2

CYS Investments Inc (NYSE:CYShiked its quarterly dividend in  the second quarter of the current year. Given the challenging macroeconomic situation that mREITs are currently facing, the correct interpretation of the hike in CYS Investments dividends is important. Let’s see where did the hike come from and what is does it mean for other Agency mREITs.

CYS Investments Inc

The company

CYS Investments has a fairly simple policy of investing in residential mortgage backed securities that have the government’s backing (Agency MBS). This qualifies the company to be a pure-play mREIT. The company’s Agency MBS’ are both fixed rate and adjustable rate in nature.

The dividend hike

Given the speculation about the Fed’s exit, mortgage rates have climbed, causing erosion in the book values of most mREITs. Analysts are expecting sector-wide dividend cuts. However, Credit Suisse expected CYS Investments to continue its first quarter’s dividend rate of $0.32 per share. In contrast, CYS Investments Inc (NYSE:CYS) reported a 6.25% sequential increase in the quarterly dividend rate, to $0.34 per share. The recent dividend hike is also in sharp contrast to the dividend cuts during prior quarters.

Where did the hike come from?

Since Ben Bernanke’s recent speech, Agency residential mREITs have been under tremendous pressure. Mortgage rates started climbing, causing mREITs to estimate huge book value depreciations. In particular, CYS Investments was not prepared for the hike in rates, and had constructed its portfolio to create benefit for the company if the rates dropped further. In the case of a 25 bps increase in the rates, CYS Investments anticipates a 10.3% decline in the coming quarter’s net income.

So, rates are on the rise, and CYS Investments Inc (NYSE:CYS) expects a decline in its bottom line: Where did the hike come from? The answer: realized gains from the past.

The company realized $500 million in gains over the past two years. Even during the first quarter, CYS investments generated $55 million from gains on investments, compared to $30 million from interest income. Around $0.16 per share was withheld by the company during the first quarter, which is now being distributed and is the source of the dividend rate increase. However, further hikes are highly unlikely as gains on investments have dried up due to higher mortgage rates.

Significance of the hike

Since CYS Investments Inc (NYSE:CYS) is a pure-play mREIT, I will attempt to compare it with other pure-play mREITs like American Capital Agency Corp. (NASDAQ:AGNC), Annaly Capital Management, Inc. (NYSE:NLYand ARMOUR Residential REIT, Inc. (NYSE:ARR). It is evident that CYS Investments dividend hike was due to past undistributed income. Therefore, investors should not expect American Capital to follow.

Page 1 of 2

Biotech Stock Alert - 20% Guaranteed Return in One Year

Hedge Funds and Insiders Are Piling Into

One of 2015's best hedge funds and two insiders snapped up shares of this medical device stock recently. We believe its transformative and disruptive device will storm the $3+ billion market and help it achieve 500%-1000% gains in 3 years.

Get your FREE REPORT and the details of our 20% return guarantee today.

Subscribe me to Insider Monkey's Free Daily Newsletter
This is a FREE report from Insider Monkey. Credit Card is NOT required.
Loading Comments...

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 102% in 3 years!! Wondering How?

Download a complete edition of our newsletter for free!