It’s been nearly a year since I looked at AGNC Investment Corp. (Nasdaq: AGNC) in Safety Net, which surprised me because it used to be one of the most-requested stocks for this column.
Perhaps the fact that the stock has gone nowhere for over a year has dampened investors’ enthusiasm. But that big, juicy 15% yield still attracts income investors, so it’s time to take another look.
In January, I gave the stock an “F” rating for dividend safety because of its track record of cutting its dividend multiple times in the past decade.
The good news was that the company was projected to generate enough net interest income, or NII, to afford the dividend. (AGNC Investment Corp. is a mortgage REIT, so we use NII as our measure of cash flow to determine the health of the dividend. NII is simply the difference between the interest the company collects and the interest it pays.)
Unfortunately, AGNC was not able to deliver on that good news. In fact, its NII fell to negative territory. Not negative growth, mind you – net interest income itself was negative. That means the company lost money.
In 2023, even though its NII was -$246 million, AGNC paid investors $1 billion in dividends.
This year, Wall Street forecasts NII to “improve” to -$42 million, and the company is still expected to pay out $1 billion in dividends.
Despite our chart provocatively pointing out that AGNC makes no money, if you look at the company’s third quarter earnings release, you’ll notice that it is in fact profitable. Through the first three quarters of the year, AGNC earned $741 million.
Why the big discrepancy between earnings and NII? The biggest reason is that the earnings calculation includes $1 billion in unrealized gains on securities.
However, a company cannot pay dividends from unrealized gains. It’s like trying to pay your electric bill with stock that you haven’t sold.
This is exactly the reason I look at cash flow when examining the safety of a dividend – or NII in the case of a mortgage REIT. It strips away all the nonsense that goes into earnings and tells us how much money the company actually brought in from running its business.
Technically speaking, thanks to perfectly legal accounting gimmicks, AGNC is profitable. But its negative NII figure reveals that more money went out the door than came in.
Now, AGNC may be able to someday sell those securities, take a $1 billion gain, and use that cash to pay its dividends. But to determine a company’s dividend safety, we have to analyze its income from running its business day to day, not from one-time or irregular big gains.
So, while AGNC has some decent assets on the books, its ongoing business does not generate enough cash (or any, for that matter) to pay its $0.12 per share quarterly dividend and maintain its 15% yield.
Add to that a poor track record of cutting the payout to investors, and you have to consider the dividend extremely unsafe and a strong candidate for a cut.
Dividend Safety Rating: F
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