With the improvement in the U.S. economy and unemployment data, the Federal Reserve will ease up on its fund easing program, or QE3. With this change, American Capital Agency Corp. (NASDAQ:AGNC) expects its prepayment risk to be constant. Also, its quarter-over-quarter interest rate spread has dropped to 1.43% from 1.63%.
The Federal Reserve’s exit will help the overall industry to gain more spread margin, as a borrower will have fewer opportunities to refinance their loans. But in the case of American Capital Agency Corp. (NASDAQ:AGNC), it is reverse, as it grants fixed-rate loans. With the increase in interest rates, its spread is likely to decrease further, as it has already written a bunch of lower interest rate loans.
To counteract this dynamic, the company is using interest rate hedging instruments, which will help it gain from a rise in interest rates. This will neutralize the low spread on its loan portfolio and benefit the company in the long run.
American Capital Agency Corp. (NASDAQ:AGNC), with a dividend payout of more than 90%, has declared a dividend of $1.25 per share for the first quarter of 2013, or an annualized dividend of $5. Its strong cash balance of around $3.3 billion, speaks to its ability to deliver future dividends. It’s also expected to maintain its gaudy dividend of around 18% in coming years.
With a strong relationship with the U.S. Department of Defense, Northrop Grumman Corporation (NYSE:NOC) is expecting future contracts, and Longbow FCRs will help the company continue to grow. The Allstate Corporation (NYSE:ALL), with its customer-oriented program, is planning to improve its CR, and its debt restructuring will help it enhance its premium and operating revenue. American Capital Agency Corp. (NASDAQ:AGNC) will use interest rate hedging instruments, to neutralize the low spread on pre-existing loans during a rising interest rate environment. Perhaps the insiders are right, all 3 of these businesses may be strong buys.
The article Insiders Are Buying These 3 Stocks originally appeared on Fool.com and is written by Madhu Dube.
Madhu Dube has no position in any stocks mentioned. The Motley Fool owns shares of Northrop Grumman. Madhu is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.