Can a company dealing in the market for mortgage-backed securities and paying a double-digit dividend yield be a safe haven? When it has the nearly undivided support of investor capital flows and when it operates around a sector of the economy where recovery is widely expected to continue, the answer is yes. So, then as the economy deteriorates, as I expect it to over the next several months, I believe Annaly Capital (NLY) will not. Besides my own beliefs, there's some hard evidence provided by historical data that shows Annaly Capital has safe haven appeal. Finally, for what it's worth, one major stock market pundit agrees as well.
This chart of NLY matched against the SPDR S&P 500 (SPY) does not necessarily look like the chart of a safe haven security, with NLY having just exaggerated the last market downturn into the close of the year; but that was likely on fiscal cliff concerns tied to potentially expiring housing incentives. Where we stand today, the real estate sector is on a short list of segments of the economy investors still believe in, by my estimation.
Perhaps a better indicator of Annaly's safe haven characteristic would measure its longer-term tracking against the market. In this regard, NLY's beta coefficient of 0.15 reflects about the lowest correlation to the market as you will find. In terms of beta, NLY also compares extremely well against a group of its mortgage REIT peers. A beta so low would seem to show insulation for investors in NLY against market fluctuations.
Beta (Yahoo Finance)
American Capital Agency (AGNC)
Two Harbors Investment (TWO)
CYS Investments (CYS)
Capital flows into equity funds have mostly found safe bets this year, with consumer staples, utilities and healthcare shares doing well. You can see this in the charts of the Utilities Select Sector SPDR (XLU), Consumer Staples Select Sector SPDR (XLP) and the Health Care Select Sector SPDR (XLV).
Indeed, this rally may be one of the most hated in history. High yielding mortgage REITs have not been neglected either since the passing of the fiscal cliff, and remain widely held and full of support. Neither does it hurt Annaly that Jim Cramer has also been publicly behind the name. Cramer offered some insight just this past Tuesday, when he noted another important safe haven characteristic of the stock, saying that Annaly Capital is more credit risk averse than many of its peers and is the name he favors in the space.
Annaly manages credit risk by investing its capital towards a portfolio of assets made up of mostly (75%) "high-quality securities." The other 25% of its assets are still invested in investment grade securities, rated "BBB" or better by Standard & Poor's, or an equivalent rating at a peer agency. Now, Annaly is not a risk-free asset, don't get me wrong, and it does have some leeway to invest in unrated securities that it deems equivalent to the ratings suggested above. Still, its return history through some tough times speaks for itself.
Annaly's chart atop this article shows its stock price performance against the SPDR S&P 500 , but if we compare the total return (including dividend payouts) of NLY from its inception to the performance of the S&P 500 Index, S&P Financials and the MSCI US REIT Index, as the company does on its website, we gain another perspective. What we see is that through a very tough decade, NLY did prove to be a safe haven and some.
Signs of economic trouble have been plentiful, with several more reaching the market just this week. On Tuesday, we received news from China and Europe indicating deterioration in the struggling Eurozone and slowing in China. On Wednesday, news came that Durable Goods Orders fell hard in March, and when excluding volatile transportation goods, orders still slipped 1.4%, against economists' expectations for a modest increase of 0.5%. On Thursday, the Kansas City Fed's Manufacturing Survey showed its area manufacturing sector contracted, with the representative index sitting at -5.0, versus economists' expectations for a reading of -1.0.
As a result of the economic data flow over the last month or so, the market has had trouble continuing its robust rise that extended through the first quarter. The SPDR S&P 500 was up just 0.7% in April through the 24th of the month, and that's after rising 10.5% in the first quarter of the year. In such a market, Annaly's appeal only increases thanks to its dividend yield of approximately 11.5%. In the case of Annaly Capital, based on all the factors listed in this article, I think the high dividend yield is just another reason for investors to see NLY as a safe haven.