Potential Winners of Quantitative Easing’s Death: American Capital Agency Corp. (AGNC) and More

The company maintained its quarterly dividend in 2012 and currently yields 15.4%. The stock is up 12.3% since the beginning of the year and is trading at a moderate 3% premium to its book value. American Capital Agency remains one of the very few mortgage REITs which was able to increase its net interest rate spread during the fourth quarter. It reported a net interest rate spread of 1.63%, up 21 basis points sequentially.

At the end of the third quarter, the company reported a net interest rate spread of 1.42%, down 23 basis points sequentially. Similarly, at the end of the second quarter of 2012, the net interest rate spread of 1.65% came down 66 basis points sequentially. This is a combined decline of 68 basis points from the first quarter of 2012. This compression in the net interest rate spread would reverse if the Fed decides to halt its easing.

Annaly Capital Management, Inc. (NYSE:NLY)

Annaly Capital Management is the largest mortgage REIT that invests exclusively in fixed-rate, long-term, high-coupon Agency residential mortgage backed securities with higher loan balances. This is why the company is experiencing high prepayment speeds and is aggressively looking to diversify its MBS portfolio by acquiring CreXus Investments.

The stock is currently trading at 5% discount to its book value and is up 6.4% since the beginning of the year. While it is currently yielding 12%, Annaly was not able to maintain its quarterly dividend during 2012. At the end of the fourth quarter, Annaly Capital posted prepayment speeds of 19% for its portfolio. At the end of the fourth quarter, Annaly Capital posted period-end net interest rate spread of 0.95%, down 7 basis points sequentially.  The third quarter end net interest rate spread of 1.02% was down 52 basis points sequentially. A similar 91 basis points decline was experienced at the end of the second quarter of 2012, which brings the total decline to 150 basis points since the first quarter of 2012.

Conclusion

I believe American Capital Agency and Annaly Capital Management are among the mortgage REITs that will benefit the most from a halt in the Fed’s quantitative easing program. A possible halt will reverse the compression in their spreads, resulting in increased dividends. Therefore, investors interested in regular income should keep an eye on the developments regarding the Fed’s March meeting.

The article Potential Winners of Quantitative Easing’s Death originally appeared on Fool.com and is written by Adnan Khan.

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