by John Persinos, contributing editor Personal Finance
While you are probably familiar with the government-sponsored
enterprises Fannie Mae and Freddie Mac, you may never have heard of Federal Agricultural Mortgage Corporation
), otherwise known as Farmer Mac.
as Fannie and Freddie exist to create a robust secondary market for
residential real estate loans, Farmer Mac exists to help ensure that
reasonably priced financing is available to America's farmers and rural
communities as well as to rural utility companies.
Farmer Mac achieves this goal primarily by purchasing agricultural
loans from lenders and packaging those loans into mortgage-backed
securities, many of which are guaranteed by the US Department of
The fact that it didn't require federal
bailout money during the financial crisis is another key difference
between Farmer Mac and its cousins. That's not to say it didn't require
In 2008, souring loans forced it to raise capital by selling $65
million in preferred stock to a network of private banks that rely on
its services to offer affordable agricultural loans. This help was a far
cry from the billions of dollars the government sank into the other
While Fannie Mae and Freddie Mac continue to struggle,
Farmer Mac has made a strong recovery over the past few years. In the
first quarter of 2012, EPS surged by 18.6 percent over the same period
last year, rising to $2.04 as net interest income bounced up by almost a
Loan loss provisions have also been on the decline at
Farmer Mac, as credit quality steadily improves. The 90-day delinquency
rate in its core Farmer Mac I Portfolio of loans has fallen to just 1.2
percent of assets, while its overall 90-day rate across all of its
assets has declined to just 0.44 percent.
improvement has been largely driven by elevated agricultural commodity
prices—corn and wheat are currently trading near post-recession
highs—and improving farmland valuations.
According to USDA
data, the average cost of farmland has shot up by more than 30 percent
over the past five years. However, even as farmers' fundamentals have
improved, Farmer Mac largely has failed to keep up.
is currently trading at just half its book value per share and just 7.2
times its forward 2012 earnings. As of the first quarter, it had $975
million in cash despite a market capitalization of only $272 million.
addition to its attractive valuation, Farmer Mac also pays out a
10-cent quarterly dividend. With a payout ratio of just 15.2 percent and
plenty of cash on the books, the company is likely to raise its payout
in the coming quarters.
With strong fundamentals that are likely
to improve further and an attractive valuation, Federal Agricultural
Mortgage Corporation rates a buy up to 31.