AGNC Investment Corp (AGNC) Stock | Long Term Analysis | Overvalued or Undervalued |

Transcript (auto-generated)

All right hello and welcome everybody to another stock announcement today we’ll be talking about agnc investment corporation ticker symbol agnc now this company is trade on nasdaq and in this video i want to talk about how this company generates its income i want to determine whether the stock is overvalued undervalued or fair valued and i also want to give a full long-term analysis on the business we will discuss intrinsic value book value net income priced earnings stock buybacks dividends and all sorts of important tangles when projecting the growth of a company and determine the true value of the stock anyway if you like this video please do like and subscribe it’s about our channel and let’s get this content to more people so that more people can understand how agnc works and also all the other stocks that we talk about work as well on our channel anyway thank you so much for watching without further ado let’s get started so how does agnc work well the company makes a majority of its income off of mortgage-backed securities why are these you ask well mortgage-backed securities are essentially home or residential mortgages that are in a way packed together into the form of an asset the idea is that a lending bank the bank that lends you the money originally will pull together a grouping of the mortgage loans that they have issued then the bank will go to a government-sponsored agency such as fannie mae or freddie mac which will package these loans and secure them into a mortgage-backed security agency then takes that income and practically distributes 90 of its income to its shareholders through dividends which is why companies like agnc and nly offer such high dividends in the realm of seven to ten percent a year agnc obtains capital to invest through repurchase agreements where a party in this case agnc sells a security and agrees to buy it back at a specified higher price at a later date this constitutes the interest which is listed below with lower interest rates this can help agnc be more profitable over the long term however if interest rates rise this can reduce if not eliminate agnc’s profitability now you might be wondering weren’t mortgage securities what caused the 2008 financial crisis and yes they had a big role in the collapse these mortgages weren’t secured by the government at that time so when people couldn’t pay their interest on their loans or if they were under water such that their house was worth less than their mortgage loan then people would default in 2008 this led to a domino effect that basically led to trillions of dollars being wiped from our financial system the case today is different if a borrower defaults on their loan a government agency will step in and buy the mortgage for the amount of principals still owed this dramatically decreases credit risk for the investors in agnc or nly that’s why there’s been a lot of renewed interest in these stocks i think these mortgage-backed securities offer a much safer return than in the past however agnc may struggle to profit off of these mortgage-backed securities in the future with potentially higher interest rates the projected free cash flow intrinsic value for agnc is about 40 a share and we calculate this by taking the growth multiple which is basically the projected rate of growth of the company in terms of earnings multiply this by the free cash flow which is a six year average then we add the shareholders equity which is simply the assets minus the day of the company multiply that by 0.8 to offset the growth multiple and then divide everything by the shares outstanding in the market in order to get the intrinsic value per share of the company now if we take a look at the free cash flow of the company we can see that most recently net free cash flow has been positive however they are paying a significant portion of their investment income through the form of dividends which is costly to their finance and cash flow their investment cash flow is when they spend money on investments i also want to note that their investment cash flow is when they spend money on investments so if the investment cash flow is negative this means that they’re spending to buy an asset whereas if it’s positive they’re actually selling an asset or getting income from an asset since they have a relatively strong operating cash flow for the year they have a net positive free cash flow however i expect their financing cash flow to decrease further due to higher borrowing costs as i expect interest rates to increase in the following years this could put their free cash flow into negative territory resulting in likely lower dividends or share offerings which is not beneficial to the shareholder currently the book value per share of agnc is about 17.51 this is fair in my opinion and it gives the company a price to book of just under one these assets are what justify tangible value for the company and with a significant asset value like that this can help to support the trading value of the stock in the industry tends to trade near book value rather than earnings growth so as long as the price of the stock stays close to its book value that can help to justify the current trading value of the stock now take a look at agn season income we can see the agnc offers a questionable quarterly net income that varies rather dramatically and this can turn away investors then income takes into account a variety of factors besides the earnings this can include the depreciation of assets and so as agnc has struggled to increase book value this can potentially be the reason for the lack of earnings growth however to be honest it’s hard to say and this isn’t much different from nly standing comment in terms of volatility the price earnings varies for this business however at the time of this video we can see that the price durings is at about six this reaffirms the idea that the fluctuation of earnings has little to do with the trading value with a p e of six that would have likely triggered some sort of balance in the share price however that hasn’t happened and we don’t expect that to happen anytime soon price earnings of agnc tends to be very low even around 1 around 2010 so the low priced earnings here actually may be considered high for the time being now unfortunately agnc isn’t willing to do much in terms of stock buybacks as noted by this chart of the shares that’s standing in the market but they do pay out a significant dividend we can see the agnc currently pays a dividend of about one dollar and 44 cents annually with a monthly rate of 12 cents this dividend is substantial giving the shareholders a nine percent yield on their investment through dividends the company’s purpose is to distribute as much cash as possible to their shareholders and through dividend reinvestment this position can grow relatively quickly if the share price remains flat due to compound interest so overall what do we think about agnc well agnc seems to be trading for about fair value and offers a substantial dividend however there are risks to any company and agnc is no exception with the current low interest rate environment agmc has been baffing off of this but let’s say the interest rates were to rise which seems likely now the company’s probability may decrease due to the higher borrowing costs so there is a noticeable risk owning an agnc for the time being and there’s an argument that maybe you should invest in index fund or mutual fund managing stocks or bonds with a diversified investment portfolio and that may offer you a safe or more steady return over the long term however it is impossible to predict the market from a growth investor’s standpoint the stock certainly doesn’t offer fast growth especially with the current uncertainties with interest rates over the long term the stock seems risky for the nine percent dividend which may not last if interest rates rise however it could be worth a small position in a long-term portfolio of course i am not a financial advisor or anything like that so please do your own research for investing and this is not financial advice anyway thank you so much for watching if you like this video and you want to see more content like this please do like and subscribe as it does about our channel and please comment down below and tell us what you think about this company we’ll try to get back to you anyway thanks again for watching and have a great day everybody.