The current price/earnings ratio of AGNC is highly deceptive:
Morningstar reports a forward P/E of 6.1.
Google Finance reports a P/E of 3.69.
Yahoo! Finance reports a P/E (ttm) of 3.53.
These are all low numbers. Single digit P/E ratios usually indicate possible value investments. But let’s take a closer look at AGNC’s earnings. Let’s adjust them for the amazing increase in the number of shares issued and used to leverage up the purchase more agency securities in the government subsidized mortgage market.
American Capital Agency Corp. (AGNC)
Shares: 124.63 M (only 36 M at end of 2010)
Market price: $27.83
Dividend yield: 20.1%
Quarterly dividend: $1.40
(EPS adjusted for drastic changes in capitalization)
EPS Avail. Adj. EPS
2008 $2.36 $35 M $0.28
2009 $6.78 $119 M $0.95
2010 $7.89 $228 M $2.31
Three year average earnings equals $1.18 per share. Value investments typically start below 12 times average earnings. In AGNC’s case 12 times average earnings equals $14.16 per share. 20 time average earnings equals $23.60 per share. AGNC is currently selling for 23.6 times average earnings. This is above 20 which makes a purchase of AGNC above $23.60 a speculative purchase.
Suddenly those low current P/Es don’t seem to hold up anymore when you calculate AGNC’s average earning power over the past three years.
I have warning in other articles that AGNC is will not be able to pay its hefty $1.40 dividend with so many new shares being issued. If it uses the proceeds of the public offering to pay the current quarter’s dividend, then it is just bidding time before it disappoints shareholders with a larger dividend cut in the future when net income decreases due to a narrowing of the interest rate spread. That’s how they make their money.