Annaly Capital cut their dividends by 10% to $.45/share as announced yesterday. It was the second cut this year, down from $.55/share several quarters ago. The company is obviously being squeezed, as I discussed in previous articles. The confusing part to me, and to any investor who might be wondering the same as me, is where is this money coming from?
A Confusing Situation
As per Yahoo Finance, NLY has about $5.5 billion in cash and total debt of $106 billion. The company has also placed a bid for complete ownership of CreXus (NYSE:CXS) for roughly $12.50 per share. I would assume they would issue notes for that purchase if it happens. On top of that, the company announced a $1.5 billion share repurchase plan for 2013.
My question is where does this money come from? If the dividends paid out in January comes to half a billion dollars, that would mean that existing cash would be reduced in 2013 by roughly $2 billion. As their business gets squeezed and less profits are made, how will they continue to finance the same dividends in 2013? I cannot see how this all works out.
If we assume that the effects of the Fed actions has just begun to have a greater impact on their business, then I will agree that the 10% haircut in the dividend this quarter could be justified. I suppose I will give Annaly the benefit of the doubt and say that must be the case.
The Facts Remain The Same
I see nothing that has changed to alter my opinion. If anything, the landscape has gotten murkier just by the smaller-than-expected magnitude of the dividend cut.
- The Fed will continue purchasing $40 billion in MBS.
- The Fed will now replace Operation Twist with a plan to purchase bonds (or more MBS) at another $45 billion per month.
- The Fed will continue to use this plan until the unemployment rate drops below 6.5%. Some say that could take 2-3 years.
- The Fed will also continue the plan if inflation stays below 2.5%.
- The spread on the yield curve, while remaining steady of late, has been reduced significantly. This places a serious impact on profitability for NLY going into the future.
- The share price has deteriorated to the point where many quarters of dividends have been eaten up, and the total return has turned decidedly negative. There does not seem to be a catalyst to reverse that trend as of yet.
The chart still remains pretty ugly for the NLY business model:
The dividend trend remains precarious:
The recent share price has taken a serious hit:
These are not pretty pictures, yet the share price did rise on yesterday's announcement.
Too many questions remain for me to get excited about the 2013 prospects for NLY. The (only) 10% cut was a nice surprise for current shareholders; however, I believe that deeper cuts will be forthcoming.
If NLY is able to shift gears into a hybrid business model, I will stand up, applaud, and buy the stock again. Until then, I will not fight the Fed!