Annaly Capital Earnings Look Good

Aug. 8.13 | About: Annaly Capital (NLY)

Yesterday afternoon Annaly Capital (NYSE:NLY) announced its latest quarterly earnings results. To the surprise of many, the results actually came in with some rather strong relative numbers.

As per this press release:

Annaly Capital Management, Inc. today reported GAAP net income for the quarter ended June 30, 2013 of $1.6 billion or $1.71 per average common share as compared to GAAP net income of $870.3 million or $0.90 per average common share for the quarter ended March 31, 2013.

Not bad for a stock that has been hammered by all the talk of the Fed tapering of QE, and the rather rapid rise in longer term interest rates.

30 Year Treasury Rate Chart
(Click to enlarge)

Several facts to note:

  • The Fed has not done anything as of yet.
  • The spread between the 2 and 10 year rates are at 233 basis points. More than 100 basis points greater than just 6 months ago. This is an indication that the mREIT sector should have more room to profit from newer "inventory".
  • The 30 year mortgage rates have climbed in tandem which allows NLY to use some additional leverage by going further out on the yield curve.
  • These indicators seem to signal that the share price of NLY has dipped too far, even though the book value has dropped to $13.03/share.

The current share price of $11.64 is selling at nearly a 12%discount, with a current dividend yield of almost 14%, even with the most recent dividend cut.

In the press release, Wellington J. Denahan, Chairman and Chief Executive Officer of Annaly, commented on the company's results:

While the resulting sell-off in the bond market put pressure on asset values during the 2nd quarter, I believe that our focus on prudent risk management and the evolution of our capital allocation strategy has helped protect our portfolio and positions Annaly to take advantage of current market opportunities. We are prepared to be opportunistic given our low leverage, strong liquidity and sizeable capital position.

What This Means For Investors

Given the fact that the share price has reached a nadir point, and is selling at a significant discount to book value, I believe that shareholders should hold their shares for now, and potential new investors have a very compelling entry price to open a new position.

NLY Chart
(Click to enlarge)

As you can see from this chart, the share price is lower now than it was back in 2009 at the peak of the recession.

While the risk of increased interest rates are still with us, the Fed has stated that when, and if, they taper down QE, it would be at a measured pace and might also be reversed if required. It is my opinion that NLY warrants consideration.

Disclosure: I am long NLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Disclaimer: The opinions of this author is not a recommendation to either buy or sell any security. Please remember to do your own research prior to making any investment decision.