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

A dividend cut is expected when American Capital Agency reports its second quarter dividends. Credit Suisse expects American Capital to slash its dividends by 20% to $1 per share. This is largely because it too was not ready for Fed’s exit. It had constructed a portfolio to benefit from lower interest rates. The company anticipates a decline in its net interest income if the rates continue their upwards journey.

ARMOUR Residential has just recently declared its third quarter monthly dividend rate of $0.07, or $0.21 per share on a quarterly basis. This is down from the prior quarter’s dividend payment of $0.24 per share. ARMOUR made purchases of new production MBS after it raised equity, thinking the Fed will continue its easing. However, the Fed signaled otherwise and the rates started climbing, causing ARMOUR’s stock price to decline, because its net interest income is anticipated to decline.

The case of Annaly Capital Management is different from the rest of the mREITs. It is the largest and one of the best managed mREITs. It has less leverage (6.7 times, compared to 9 times for ARMOUR) in its capital structure which reduces volatility in its net interest income. Further, the presence of commercial real estate loans and the returns coming from CreXus Investments provide a cushion to the company’s book value and net income, respectively. The cost savings of up to 13 bps due to the externalization of the management cannot be ignored. Therefore, with the solid support to the bottom line, I expect the company to maintain its $0.40 per share.

Foolish takeaway

Much of the dividend hike in CYS Investments Inc (NYSE:CYS) can be associated to prior quarter’s undistributed income. Therefore, the hike cannot be termed sustainable and investors should not expect other pure-play mREITs like American Capital Agency to follow. However, Annaly Capital has a better chance to maintain its dividends due to the aforementioned company specific positive drivers.

Adnan Khan has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

The article What Does the Dividend Hike For This Agency mREIT Mean? originally appeared on Fool.com.

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