We currently have a neutral outlook on AGNC’s common shares, though it is close to turning bullish following the recent weakness in share prices. We utilize estimates by Scott Kennedy in coming to our ratings on the common shares.
We want to focus on the preferred shares in this article.
Over the years, we’ve been invested in AGNC’s preferred shares a dozen times. Every time we’ve invested in these preferred shares, we’ve been happy with the results.
Here’re the basics of the new preferred share:
- Risk Rating: 1
- Initial coupon rate: 6.5% (about $1.63 per year)
- Dividend is paid quarterly
- Callable starting: 10/15/2024
- Floating rate begins: 10/15/2024
- Spread over 3-month LIBOR (or replacement index): 4.993% (higher than we expected, which is good for investors)
- Target buy-under price (for The REIT Forum): $25.27
- AGNCO was AGNIP in the grey market.
We compared other preferred shares to AGNCO in a recent article to subscribers.
The 6.5% coupon rate matches NLY-G. However, NLY-G has a floating spread of 4.172% vs. 4.993% for AGNCO.
Call protection ends 3/31/2023 for NLY-G and 10/15/2024 for AGNCO.
Which do you think you’d rather own 4 years from now assuming equal prices? Probably AGNCO, since it would still have some call protection and you’d be starting to think about the difference in the spreads.
NLY-G is currently $25.04, so if AGNCO is available for less than $25.04 then it would clearly be undervalued on a relative basis.
Comparison to AGNCN
AGNCN has a higher coupon rate of 7.00%. That’s worth about $.12 per year while both have a fixed-rate. All else equal, with 5 years of call protection on AGNCO, we could ballpark that AGNCO should be $.60 cheaper than AGNCN to offset the difference. When both shares switch to floating rates, the rates are pretty similar. AGNCN pays a spread of 5.111% over the short-term rates compared to 4.993% for AGNCO. Those values are close enough that the difference is pretty small.
The other factor to include is that AGNCN is callable (and begins floating) on 10/15/2022. AGNCN is currently $26.31, but has $.43 in dividend accrual. The stripped price is $25.88 (that is $26.31 minus $.43).
Note: this was quoted directly from the initial alert to subscribers, which was prepared prior to AGNCN’s ex-dividend date.
We have a pretty large position in AGNCN, but that $.88 premium in the stripped price represents quite a bit of call risk since shares become callable in about 3 years. All else equal, we would prefer not to have as much call risk.
Consequently, we think that after AGNCN goes ex-dividend, the difference in price between the two shares should usually be in the range of $.50 to $.85.
Prior to AGNCN going ex-dividend (on 9/30/2019), the spread should be about $.93 to $1.28.
We’ll narrow that range down a little over time, but it gives us a pretty clear target.
Upcoming – Grey Market Symbol
Shares usually begin trading on the grey market. Many investors will be able to access the grey market, though we can’t speak for whether your individual broker allows it. We know Schwab (NYSE:SCHW) has always allowed us to trade on the grey market and we believe investors with Fidelity were able to successfully trade NLY-I on the grey market without calling in.
That’s unusual because Fidelity normally requires investors to call them before placing a trade for any security that switches to a floating rate.
When we have the grey market symbol announced, we will post a brief follow-up. We may formalize price targets as well.
Based on pricing for other preferred shares from Annaly (NLY) and AGNC, we suspect these shares will quickly move up to at least $25.30, probably closer to $25.50.
We will most likely be buying shares if they open around $24.50 to $24.75.
We might unload our position in AGNCN to cover the cost. The risk is extremely similar, but we expect to favor the price for AGNCO. Both are great shares, but we love to save some money on the position.
Update: Trade Placed
We followed up our introduction with a buy alert on AGNCO for subscribers.
As we discussed in last night’s introduction of AGNCO (the part you just read), we are opening with a buy rating on shares. They will carry a risk rating of 1. We will add them to the spreadsheet once they trade under their permanent ticker.
Our initial buy-under price is coming in at $25.27, towards the top end of the range we projected.
We’ve purchased 1,570 shares of AGNIP (soon to be AGNCO) with a weighted average price of $24.905.
To have sufficient cash for the order, we closed out our newest position (1,460 shares) in NLY-F at $26.01.
There is nothing wrong with NLY-F, but we would gladly take AGNIP at $24.91 over NLY-F at $26.01. The shares will carry the same floating rate, but AGNIP has more call protection. Before floating rates kick in, AGNIP has a lower yield. However, the total value of the difference in dividends will be around $.11 per year prior to the floating rate. We estimate the value as being a little less than $.55 in total due to discounting the future cash flows.
Therefore, AGNIP is a better deal if the price is about $.55 lower.
If the price is $1.10 lower ($26.01 vs. $24.91), then AGNIP is a clear winner. Today, that is the difference in prices.
Who Wants AGNIP (or AGNCO)?
AGNIP is suitable for the vast majority of investors. For many buy-and-hold investors, this would be a great share to use as the cornerstone of an income portfolio. We believe shares will rally soon after they enter the regular trading market, perhaps even before, so they are also suitable for traders.
For buy-and-hold investors hunting for that first position from our service, we believe this is an excellent opportunity.
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Disclosure: I am/we are long AGNCN, AGNCO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.