Key Points
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AGNC turned in its best quarterly performance since 2023.
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The company saw a sharp sequential increase in its tangible book value, as its mortgage-backed securities portfolio recovered.
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While its net spread income did not cover its dividend payout this quarter, I wouldn’t expect a cut anytime soon.
When investors go looking for stocks with high dividend yields, they inevitably run into AGNC Investment (NASDAQ: AGNC), which currently carries a yield north of 14%. However, many investors may be confused as to what exactly the company does, and why its stock has struggled during the past five years.
AGNC is a mortgage real estate investment trust (mREIT) that owns agency mortgage-backed securities (MBS). Most of its portfolio is in MBS backed by government agencies, which means they carry virtually no default risk.
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However, that doesn’t mean AGNC’s business is risk-free — far from it.
Signs of a better environment
AGNC’s biggest challenge in recent years has been the sharp rise in mortgage rates coming out of the pandemic. First, the Federal Reserve aggressively hiked rates to curb inflation, which pushed borrowing costs sharply higher. Mortgage rates climbed in lockstep, but that wasn’t the whole story.
The even bigger issue for AGNC was that the spread between MBS and Treasuries also widened dramatically. During the pandemic, the Fed was a huge buyer of MBS, which kept yields low and spreads tight. Once it stopped those purchases and began allowing its MBS holdings to mature and run off, demand faded, and spreads began to widen, reducing the value of AGNC’s MBS holdings.
At the same time, banks, which were already sitting on losses from falling bond prices, started to pull back from the MBS market. The collapse of Silicon Valley Bank, which was heavily exposed to long-duration MBSs, only added to banks becoming more averse to owning the securities.
The effects on AGNC
The impact on AGNC’s balance sheet during this stretch was severe. Its tangible book value (TBV) fell 45% from $15.75 at the end of 2021 to $8.70 at the end of 2023. Even after the Fed stopped raising rates, its TBV continued to fall, hitting $7.81 in Q2 2025. For AGNC, TBV has always been one of its key metrics, and where it goes, the stock tends to follow. The reason for this is that TBV is essentially the value of the company’s MBS portfolio.
However, AGNC saw a nice bounce back in its TBV in Q3, with it rising 6% sequentially to $8.28 as of the end of September. It also paid out $0.36 per share in dividends in the quarter, bringing its total economic return on tangible common equity to 10.6%. That basically means its MBS portfolio generated a 10.6% return in the quarter.
Turning to other important metrics, AGNC’s average net interest spread was 1.78%, compared to 2.21% a year ago and 2.01% in the second quarter. AGNC’s net interest spread has been narrowing, as it has been getting less hedging income. Mortgage REITs tend to hedge their financing costs to better match them with the durations of their assets, although AGNC has seen some attractive hedges roll off. It has also begun moving more toward Treasury-based hedges, which are not reported in its net interest spread or net spread income.
Overall, AGNC generated $0.35 per share in net spread and income from dollar rolls (a hedging strategy equivalent to short-selling, but specifically employed in MBS markets to avoid losses when MBS values decline). This is what AGNC used to pay out its dividend, but it did fall $0.01 short of covering it this quarter.
The company was aggressive in the quarter raising capital, issuing $309 million in equity through ATM (at-the-market) offerings, and $345 million for a preferred offering. While equity offerings are dilutive for regular companies, when done above TBV for mREITs, they actually increase TBV and are an effective way to raise funds to buy more MBS without increasing leverage.
AGNC ended the quarter with 7.6 times tangible net book value “at risk” leverage (debt plus net receivables or payables for unsettled investment securities outstanding/shareholder equity excluding goodwill). That was unchanged compared to Q2 and up from 7.2 times a year ago.
This was actually the best quarterly performance by AGNC from an economic return perspective since the last quarter of 2023. Meanwhile, it should benefit from the Fed cutting rates later this year and banks and money managers returning to the MBS market.
Image source: Getty Images.
Is AGNC stock a buy?
While its net spread and income from dollar rolls came in just shy of what it pays out in its dividend, this was largely due to the mREIT raising capital while not fully yet deploying it in the quarter. It also has the ability to increase its leverage as well, and while spreads between agency MBS and Treasuries have tightened, they still remain historically attractive. In fact, the company said that MBS spreads have become more defined, and that when they reach the upper end of the range, it tends to attract more buyers.
As such, I would expect the dividend to remain intact and TBV to start edging up higher, making the stock an attractive buy.
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Geoffrey Seiler has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.