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Pre Q2 Earnings: How Should You Play AGNC Investment (AGNC)?
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AGNC Investment Corp. (AGNC - Free Report) is slated to report second-quarter 2024 earnings on Jul 22. The AGNC stock is trading just 2.5% below its 52-week high of $10.64 per share. So, should investors buy the stock ahead of Q2 earnings?
Before we discuss the investment worthiness of the AGNC stock, let us see how it has fared in the past.
The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the earnings surprise being 13.90%, on average.
Image Source: Zacks Investment Research
Let’s check out how AGNC is expected to fare in terms of revenues and earnings this time.
The Zacks Consensus Estimate for second-quarter revenues is pegged at $404 million, suggesting a surge of 685.5% from the year-ago quarter's reported figure.
In the past 30 days, the consensus estimate for earnings for the to-be-reported quarter has remained unchanged at 53 cents. The projection suggests a 20.9% decline from 67 cents reported in the prior-year quarter.
Image Source: Zacks Investment Research
Earnings Whispers for Q2
Our proven model does not conclusively predict an earnings beat for AGNC Investment this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
In the second quarter, mortgage rates declined marginally, with the rate on a 30-year fixed mortgage declining to 6.7% in June from 6.8% at the start of April. This is likely to have resulted in a slight rise in mortgage demand. Yet, origination volumes (particularly purchase originations) remained lower compared with the prior quarter’s levels due to home price appreciation.
Yet, supported by lower mortgage rates, there is a likelihood of a modest improvement in refinancing activities. Amid this, a significant portion of AGNC Investment’s MBS holdings is anticipated to have witnessed elevated levels of constant prepayment rate (CPR).
This is expected to have positively impacted net premium amortization in the second quarter, supporting growth in interest income and average asset yield. The Zacks Consensus for interest income is pegged at $645.2 million, suggesting a marginal increase from the first-quarter 2024 figure.
The Federal Reserve kept the interest rates steady during the quarter at a 23-year high of 5.25-5.5%. Given the high interest rates, the company is expected to have seen higher funding costs. This is likely to have affected net interest income (NII) growth in the to-be-reported quarter.
With this, the consensus estimate for second-quarter NII of $404 million indicates a 22.8% fall from the quarter-ago reported figure.
Lower volatility in the fixed-income markets is likely to have reduced asset impairment risks and hedging mismatches for AGNC Investment in the quarter under review. In anticipation of economic slowdown, spread tightening and lower volatility, the company is expected to have rotated agency assets to credit-sensitive assets.
Lower fixed-income volatility is likely to have driven mortgage spreads tighter, thus increasing AGNC Investment’s book value per share.
Price Performance & Valuation
AGNC underperformed the S&P 500 in the first half of 2024. Other REIT and Equity Trust stocks like Annaly Capital Management (NLY - Free Report) and Arbor Realty Trust (ABR - Free Report) also underperformed the S&P 500 index in the first half.
First Half 2024 Price Performance
Image Source: Zacks Investment Research
NLY is scheduled to report its second-quarter earnings on Jul 24, while ABR is expected to report its second-quarter 2024 results on Jul 26.
Now, let’s look at the value AGNC offers investors at current levels.
Currently, AGNC stock is trading at 5.02X forward 12 months earnings, below its median level of 5.90X and the industry’s forward earnings multiple of 8.44X. The company’s valuation looks somewhat cheaper compared with the industry average and its range.
Price-to-Earnings (Forward 12 Months)
Image Source: Zacks Investment Research
Investment Thesis: Balancing Risk and Reward
AGNC Investment is well poised to benefit as it adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio and hedges amid a varying interest rate and mortgage market environment. The company focuses on leveraged investments in Agency residential mortgage-backed securities (RMBS). That includes residential mortgage pass-through securities and collateralized mortgage obligations. The GSE guarantee for the principal and interest payments makes Agency MBS a safer investment choice.
The company rewards its shareholders handsomely. It has a record of paying monthly dividends. AGNC’s current dividend yield is 13.9%. This is impressive compared with the industry’s average of 11.4% and attracts investors as it represents a steady income stream.
The ultra-high dividend yield and regular payout look eye-catching for most investors watching for high-income funds. In April 2020, AGNC slashed its dividend by 25% to 12 cents per share and continued to pay the same amount in later periods. It has a history of cutting its dividends at times of economic distress.
The operating performances of mREITs depend on conditions prevalent in the broader financial markets and the macroeconomic situation. Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and deterioration of the generic financial conditions affect the performance of the company's investments.
Conclusion
As AGNC Investment approaches announcing its second quarter 2024 earnings result, the lower fixed-income volatility and higher refinancing activities paint a positive picture for the company.
Yet, a high interest rate environment might affect NII growth in the to-be-reported quarter.
Although AGNC has a high dividend yield and provides a regular income option, investors might not be able to rely on it over time. The company has a track record of lowering dividends during stressful times. Prospective investors should also exercise caution as any volatility in the interest rate will affect its performance.
Based on these factors, investors should not rush in to buy the stock but instead wait for a better entry point.
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Pre Q2 Earnings: How Should You Play AGNC Investment (AGNC)?
AGNC Investment Corp. (AGNC - Free Report) is slated to report second-quarter 2024 earnings on Jul 22. The AGNC stock is trading just 2.5% below its 52-week high of $10.64 per share. So, should investors buy the stock ahead of Q2 earnings?
Before we discuss the investment worthiness of the AGNC stock, let us see how it has fared in the past.
The company has an impressive earnings surprise history. Its earnings outpaced the Zacks Consensus Estimate in each of the trailing four quarters, the earnings surprise being 13.90%, on average.
Let’s check out how AGNC is expected to fare in terms of revenues and earnings this time.
The Zacks Consensus Estimate for second-quarter revenues is pegged at $404 million, suggesting a surge of 685.5% from the year-ago quarter's reported figure.
In the past 30 days, the consensus estimate for earnings for the to-be-reported quarter has remained unchanged at 53 cents. The projection suggests a 20.9% decline from 67 cents reported in the prior-year quarter.
Earnings Whispers for Q2
Our proven model does not conclusively predict an earnings beat for AGNC Investment this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the odds of an earnings beat. This is not the case here. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
AGNC has an Earnings ESP of 0.00% and a Zacks Rank #3. You can see the complete list of today’s Zacks #1 Rank stocks here.
Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.
Trends Leading Up to AGNC’s Q2 Results
In the second quarter, mortgage rates declined marginally, with the rate on a 30-year fixed mortgage declining to 6.7% in June from 6.8% at the start of April. This is likely to have resulted in a slight rise in mortgage demand. Yet, origination volumes (particularly purchase originations) remained lower compared with the prior quarter’s levels due to home price appreciation.
Yet, supported by lower mortgage rates, there is a likelihood of a modest improvement in refinancing activities. Amid this, a significant portion of AGNC Investment’s MBS holdings is anticipated to have witnessed elevated levels of constant prepayment rate (CPR).
This is expected to have positively impacted net premium amortization in the second quarter, supporting growth in interest income and average asset yield. The Zacks Consensus for interest income is pegged at $645.2 million, suggesting a marginal increase from the first-quarter 2024 figure.
The Federal Reserve kept the interest rates steady during the quarter at a 23-year high of 5.25-5.5%. Given the high interest rates, the company is expected to have seen higher funding costs. This is likely to have affected net interest income (NII) growth in the to-be-reported quarter.
With this, the consensus estimate for second-quarter NII of $404 million indicates a 22.8% fall from the quarter-ago reported figure.
Lower volatility in the fixed-income markets is likely to have reduced asset impairment risks and hedging mismatches for AGNC Investment in the quarter under review. In anticipation of economic slowdown, spread tightening and lower volatility, the company is expected to have rotated agency assets to credit-sensitive assets.
Lower fixed-income volatility is likely to have driven mortgage spreads tighter, thus increasing AGNC Investment’s book value per share.
Price Performance & Valuation
AGNC underperformed the S&P 500 in the first half of 2024. Other REIT and Equity Trust stocks like Annaly Capital Management (NLY - Free Report) and Arbor Realty Trust (ABR - Free Report) also underperformed the S&P 500 index in the first half.
First Half 2024 Price Performance
NLY is scheduled to report its second-quarter earnings on Jul 24, while ABR is expected to report its second-quarter 2024 results on Jul 26.
Now, let’s look at the value AGNC offers investors at current levels.
Currently, AGNC stock is trading at 5.02X forward 12 months earnings, below its median level of 5.90X and the industry’s forward earnings multiple of 8.44X. The company’s valuation looks somewhat cheaper compared with the industry average and its range.
Price-to-Earnings (Forward 12 Months)
Investment Thesis: Balancing Risk and Reward
AGNC Investment is well poised to benefit as it adheres to an active portfolio-management policy, which includes re-evaluation and adjustment of its portfolio and hedges amid a varying interest rate and mortgage market environment. The company focuses on leveraged investments in Agency residential mortgage-backed securities (RMBS). That includes residential mortgage pass-through securities and collateralized mortgage obligations. The GSE guarantee for the principal and interest payments makes Agency MBS a safer investment choice.
The company rewards its shareholders handsomely. It has a record of paying monthly dividends. AGNC’s current dividend yield is 13.9%. This is impressive compared with the industry’s average of 11.4% and attracts investors as it represents a steady income stream.
The ultra-high dividend yield and regular payout look eye-catching for most investors watching for high-income funds. In April 2020, AGNC slashed its dividend by 25% to 12 cents per share and continued to pay the same amount in later periods. It has a history of cutting its dividends at times of economic distress.
The operating performances of mREITs depend on conditions prevalent in the broader financial markets and the macroeconomic situation. Any volatility in the mortgage market, unfavorable change in the shape of the yield curve, interest-rate volatility and deterioration of the generic financial conditions affect the performance of the company's investments.
Conclusion
As AGNC Investment approaches announcing its second quarter 2024 earnings result, the lower fixed-income volatility and higher refinancing activities paint a positive picture for the company.
Yet, a high interest rate environment might affect NII growth in the to-be-reported quarter.
Although AGNC has a high dividend yield and provides a regular income option, investors might not be able to rely on it over time. The company has a track record of lowering dividends during stressful times. Prospective investors should also exercise caution as any volatility in the interest rate will affect its performance.
Based on these factors, investors should not rush in to buy the stock but instead wait for a better entry point.