A 14% Yield You Can't Miss

Piyush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

We all know what happened during the crash of the 2008-2009, and most of the investors prefer to stay away from mREITs. The pessimism is justified, given the amount of risks they incur, but hey, no risk no reward right? Well we don’t mean that any risky investment would yield good returns, but any sound investment just might do the job. The Federal Reserve Bank announced a stimulus package, and we believe that American Capital Agency Corp (NASDAQ: AGNC) has the juice to skyrocket.

American Capital Agency Corp is a real estate investment trust that buys federal backed mortgages and sells them in the form of securities directly into the market. The company earns interest payments on the mortgages it sells, and any reduction in the residential property prices is reflected as a direct loss to the company. On the contrary if the property prices start increasing, the assets held by the company appreciate, reflecting as profits for the company. The company has over $100 billion in assets under management with seven offices across US and Europe.

The Federal Reserve recently announced its stimulus package which involves a spending of $40 billion every month on bond purchases. China too in a bid to kick start the growth engine had announced a $156 billion program focusing on infrastructure projects. Japan joined the party by increasing its stimulus package to over $1 trillion. Talking about Europe, the proposed $85 billion spending to purchase risky mortgages off the market is also being awaited eagerly by the market, and all this once through would mean added liquidity in the market.

The federal reserve bank also announced that the us economy will have a low interest rate environment until 2015, and the added liquidity coupled with low interest rates, is expected to increase infrastructure projects and real estate investments. Any boost in the real estate investments would increase residential property prices, which would mean increased profitability of American Capital Agency Corp.

I like insider transactions, as the insiders know best about the company. Gary Kain on August 7 purchased 20,000 shares of the company on his personal capacity. Insider buying suggests the amount of faith the insiders have in the company, and this suggests the same.

The company shares its market with CYS Investments (NYSE: CYS), Annaly Capital (NYSE: NLY) and Invesco Mortgage Inc. (NYSE: IVR). From the comparison of stock prices over the past 5 years, we can see that American Capital has been outperforming its peers by offering stellar returns of over 105%.

 

<img src="/media/images/user_13723/agnc_large.JPG" />

Looking at the financial metrics of the competitors, our pick becomes American Capital Agency. The company yield the highest dividend, and alongside boasts of highest returns on its investments. Analysts expect the EPS growth to be around 14.81% over the next year. American Capital enjoys a net profit margin of 49.4% and a gross profit margin of 75.8%. Clearly American Capital offers the best mix of numbers from the table below.

<table> <tbody> <tr> <td> <p>Company</p> </td> <td> <p>Dividend Yield</p> </td> <td> <p>ROI</p> </td> <td> <p>EPS growth expected next year</p> </td> </tr> <tr> <td> <p>American Capital</p> </td> <td> <p>14.2%</p> </td> <td> <p>10.1%</p> </td> <td> <p>14.8%</p> </td> </tr> <tr> <td> <p>CYS Investments</p> </td> <td> <p>12.1%</p> </td> <td> <p>3.1%</p> </td> <td> <p>16.7%</p> </td> </tr> <tr> <td> <p>Invesco Mortgage</p> </td> <td> <p>13.4%</p> </td> <td> <p>2.34%</p> </td> <td> <p>-1.48%</p> </td> </tr> <tr> <td> <p>Annaly Capital</p> </td> <td> <p>12.5%</p> </td> <td> <p>4.9%</p> </td> <td> <p>4.9%</p> </td> </tr> </tbody> </table>

It is the stimulus packages and mostly the third round of Quantitative Easing which is expected to be a big positive for the mortgage investment trusts. The company sports a good mix of numbers and the past comparative performance supports that. Additionally the skyrocketing dividend sets this stock apart and it is due to these reasons that we believe American Capital could show an upsurge in its stock price.


PiyushArora has no positions in the stocks mentioned above. The Motley Fool owns shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.

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