Wunderlich Securities Comments On American Capital Agency Corp.

American Capital Agency Corp. AGNC reported earnings and posted a balance sheet in line with data that was pre-released in January. Investment opportunities driven by regulatory pressures and the capping of GSE-owned portfolios, as well as interest rate trends appear rich to Wunderlich Securities, and while it notes that spreads appear to be at a cyclical peak, Oppenheimer believes AGNC has the means and opportunity to drive a more sustainable dividend as a consequence of capital raising in 2010 and year-to-date in 2011. Wunderlich notes that spread income of $1.20/share fell short of the $1.40 4Q10 dividend, but that the gap is narrowing between spread earnings and the distribution. Also, book value increased by $1.76/share during the year. AGNC's strategy was a bit unorthodox because the portfolio is more actively managed than is typically the case with REITs, but it is hard to argue with success. Going forward, Wunderlich expects dividends could be covered by core spread income. Wunderlich's price target is based on about a 1.35 multiple of book value, or $34/share. It believes AGNC's active portfolio management has demonstrated an ability to increase financial flexibility while maintaining an above-average ROE. Wunderlich has a Buy rating on AGNC AGNC closed Tuesday at $29.26