Preferred Stock IPO: 7% Fixed To Floating From AGNC Investment – AGNC Investment Corp. (NASDAQ:AGNC)

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The new issue

AGNC Investment Corp. (NASDAQ:AGNC) 7.50% 7.00% Series C Fixed-to-Floating Rate Cumulative Redeemable Preferred Stock ((NASDAQ:AGNCN)) is the next security in the fixed-to-floating preferred stocks family.

The total gross proceeds from the new preferred stock are $300M. You can find some relevant information about AGNCN in the table below.

Source: Author’s spreadsheet

AGNCN pays a fixed dividend at a rate of 7.00% before 10/15/2022 and then switches to paying a floating rate dividend at a rate of the three-month LIBOR plus a spread of 5.111%. The new issue bears no S&P rating, pays quarterly dividends and is callable as of 10/15/2022. In addition, dividends paid by this preferred stock are NOT eligible for the preferential 15% to 20% tax rate on dividends and are also NOT eligible for the dividend received deduction for corporate holders.

AGNC Investment Corp

From AGNC Investment:

AGNC Investment Corp. [NASDAQ:AGNC] is an internally-managed real estate investment trust (“REIT”). We invest predominantly in agency mortgage-backed securities (“agency MBS”) on a leveraged basis, financed primarily through collateralized borrowings structured as repurchase agreements. Our principal investment objective is to provide our stockholders with attractive risk-adjusted returns through a combination of monthly dividends and net asset value accretion. We generate income from the interest earned on our investment assets, net of associated borrowing and hedging costs, and net realized gains and losses on our investments and hedging activities. We utilize an active portfolio management philosophy with the goal of preserving net asset value over a wide range of market scenarios. We were founded in 2008 and are headquartered in Bethesda, Maryland.

You can find some price and profitability information for the company in the chart below.

Source: Fastgraphs.net

The dividend paid by AGNC is decreasing from $5.15 in 2009 to $2.30 in 2016, which is more than halved. With the market price of $21.57, the current yield of AGNC is 10.66%. As an absolute value, the company has paid over $800M, while the company needs only about $35M for the early preferred stock dividends. This is a really tiny amount, compared to the common stock dividend.

In addition, with about $7.9B market capitalization, AGNC is a company that is doing quite well.

Capital structure

Source: Company’s Balance sheet

As of the latest earnings, the company had a total debt of $405M ranking senior to the newly issued preferred stock. The new Series C preferred shares rank junior to all the outstanding debt and pari passu with the other outstanding preferred stocks, which currently total $336 ($172.5M worth of Series A Cumulative Preferred Stock ((NASDAQ:AGNCP)) and $175M worth of Series B Fixed to Floating Cumulative Preferred Stock ((NASDAQ:AGNCB))).

The peer group

AGNC has two outstanding preferred stocks: 8.00% Series A Cumulative Redeemable Preferred Stock ((NASDAQ:AGNCP)) and 7.75% Series B Cumulative Redeemable Preferred Stock ((NASDAQ:AGNCB)).

The company uses a portion of the proceeds of the new stock to redeem the Series A preferred stock. This refinancing saves the company a rate of 1.25% on yearly basis. In the table below you can see the basic data of AGNCP.

Source: Author’s spreadsheet

The other stock, AGNCB, pays fixed dividend at a rate of 7.75%. The current yield of this preferred stock is 7.54%. While we expect AGNCN to become trading close to par value, AGNCB looks like the better security than the new issue. As I always say, the best yield for the investor is the yield to worst, which for AGNCB is its 6.56% yield to call. This tilts the scales in favor of AGNCN. In the next table, there is some fundamental information about AGNCB.

Source: Author’s spreadsheet

Sector comparison

Source: Author’s spreadsheet

The image contains all preferred stocks issued in the REIT – Residential sector (according to Finviz.com) by their current yield. Important notice is that none of these preferred stocks are eligible for 15% federal tax rate.

mREITs

Source: Author’s spreadsheet

The chart above displays all preferred stocks and baby bonds issued by mREITs by their nominal yield and current yield.

The most comparable preferred stock is NLY-F. Here is some data about that issue.

Source: Author’s spreadsheet

NLY-F is the latest preferred stock from Annaly Capital Management (NYSE:NLY). The IPO was less than a month ago. NLY-F is also fixed-to-floating, has no S&P rating and has similar call date. NLY-F pays a fixed dividend at a rate of 6.95% before 09/30/2022 and then if not being called switches to paying floating rate dividend at a rate of the three-month LIBOR plus a spread of 4.993%. The yield to call of NLY-F is 6.94%, which only confirms the similarity of NLY-F and AGNCN.

All fixed-to-floating preferred stocks

Source: Author’s spreadsheet

This image contains all fixed-to-floating preferred stocks paying a dividend.

Special considerations

Nothing out of the ordinary.

Addition to the S&P preferred stock index

With the current market capitalization of AGNCN of $300M, it is a potential addition to the S&P preferred stock index. If the average monthly volume of AGNCN after its first six months on the Nasdaq is more than 250,000, it would be eligible to be included in the S&P U.S. Preferred Stock Index. With fewer than six months of trading history, issues are evaluated over the available period and may be included if available trading history infers the issue will satisfy this requirement.

Conclusion

In this article, I gave you a brief overview of AGNC Investment Corp’s new issue, AGNCN. Fundamentally, AGNCN looks good. As I pointed out above, NLY-F is almost the same, so if you like one of them, you have to like the other, too.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: I am long AGNCB

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