ACAS American Capital, Ltd.

American Capital Agency Corp. (AGNC), a leading real estate investment trust (REIT) that focuses on investments in mortgage pass-through securities and collateralized mortgage obligations (CMOs), has recently declared second quarter 2011 dividend of $1.40 per share. American Capital has historically paid a steady dividend over the years and has a unique distinction of being one of only a few companies to have even increased its dividend during the economic downturn.

The current dividend payout has been kept unchanged from that of the first quarter and equates to a total dividend of $16.06 per share since its initial public offering in May 2008. Shares of American Capital began trading on NASDAQ on May 15, 2008. The company sold 10 million shares at an initial offering price of $20.00 each.

About 5 million shares were privately placed at the offer price by the company’s external manager which owns 33% of the shares. American Capital is externally managed by American Capital Agency Management, a wholly owned subsidiary of American Capital Strategies, LTD (ACAS), a $37 billion publicly traded asset management company.

American Capital invests only in fixed-rate agency securities where payments are guaranteed by the U.S. government or government-owned entities, such as Fannie Mae (FNMA), Freddie Mac (FMCC) and Ginnie Mae. Specifically, American Capital invests in FMCC Gold certificates, FNMA certificates, and Ginnie Mae certificates.

With the government takeover of FNMA and FHLMC, American Capital’s securities now have an explicit government guarantee, which makes it a much more attractive prospect for investors. Additionally, the company’s portfolio of government-backed assets is relatively liquid and credit risk is limited.

Furthermore, American Capital purchases payer swaptions to protect against lower interest rates that might lead to early prepayment of the mortgages. This measure ultimately facilitates the company to continue making money by collecting premium and ensures a steady revenue stream.

We maintain our ‘Neutral’ rating on American Capital, which presently has a Zacks #3 Rank that translates into a short-term ‘Hold’ rating, indicating that the stock is expected to perform in line with the overall U.S. equity market for the next 1–3 months.

 
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