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Summary

  • In my previous article I suggested that shares should be purchased prior to the earnings came out.
  • I suggested that the book value of Annaly would show a significant increase.
  • I am still of the opinion that higher dividends are ahead for shareholders.

Without belaboring the point, Annaly Capital (NYSE:NLY) announced more than an upside earnings surprise, but also confirmed my thesis that down the road, sooner than later, shareholders should see higher dividends, as well as capital appreciation. The higher dividends should come as a result of the business plan that NLY has now set firmly in place, a very stable interest rate environment, and a continuing policy of accommodation by the Federal Reserve monetary policy, even as they move away from quantitative easing.

The capital appreciation I suggested should come from not only the business model, but the news within the earnings report that the book value of NLY had increased more than expected, and now stands at $13.23.

Based on today's closing price, that represents a discount to book of roughly 15%. I believe that given the direction of the company, that discount will be narrowed considerably in the weeks and months ahead.

The Key Highlights To Note

Getting right to the point of the earnings report, these are the positive takeaways that current and potential shareholders should note:

  • Core earnings of $300.4 million, $0.30 earnings per common share
  • Strong capital position with capital ratio of 15.4% and leverage of 5.3:1
  • Book value of $13.23, up from $12.30 as of prior quarter
  • Net interest rate spread of 1.26%, up from 0.90% in prior quarter

CEO Wellington Denahan had this to say prior to the company conference call:

We welcome the continued reduction of monetary policy influences on the markets and all the opportunities it brings. We continue to feel comfortable in our ability to sustain attractive risk-adjusted returns in the quarters ahead.

If you have trust in management, which I do, then that really is all that needs to be stated publicly in my opinion.

Here is what I said in my previous article noted above:

I like NLY because of its lower use of leverage, and more conservative approach to how it navigates the business. Add this to the focus on becoming a unique hybrid mREIT (RMBS, CMBS, and triple net lease agreements) and I believe that not only will the book value of NLY rise, but so will net income and dividends, sooner than later, and perhaps even next quarter. This quarter ends in one week, and we will know more details around the first or second week of August, when the company reports.

I expect a very solid quarter.

Now all we need to do is wait for an announcement that higher dividends will be announced, and my forecast will be complete.

I also said that I can see the share price revisit the $19.00 range, and while this lofty goal will not happen overnight, as business continues to produce, and the book value of NLY continues to increase, the share price should reflect the growth. For now, I expect an immediate share price increase within weeks, by 10%, which would bring the price to about $12.60 per share, still well below the current book value.

During the conference call, Denahan stated:

We have maintained leverage at very conservative 5.3:1 while delivering solid core earnings of $0.30 per share and we believe we can continue to support a competitive dividend going forward. The fundamentals of the mortgage market remain strong, notwithstanding the reduction in asset purchases by the Federal Reserve and we'll continue to offer competitive relative returns even as short rates move higher.

Addressing a valid question about risk, Denahan responded:

I would say the rate risk in the portfolio is not unlike the rate risk in the portfolio that we've had for years. Again we are in the business of taking rate risk and you have to weigh a lot of the uncertainty. We are always in a world of uncertainty and I don't think we're unique in that. But just looking at across the risk spectrum that I feel that you are getting paid for the risks that you are taking in the agency arena whereas if you look to some of the corporate high grade debt and high yield, I don't know if you are getting compensated for the relative risks that you are taking and you don't necessarily have the same liquidity profile which I can't stress enough that it's a very valuable asset that is not necessarily quantifiable. So we're always going to be dealing with periods of uncertainty and having to deliver what I call our product which is our dividend which as Kevin mentioned represents the majority of the return that we have generated for investors over the years and we can't lose sight of producing that product. But we do it and we have to look to do in a way that we feel comfortable given what the landscape looks like. (Emphasis added by the author)

For greater details in specific areas, here is the link to the slide presentation from the earnings report itself.

The Bottom Line

I believe that this dividend opportunity stock is now headed for higher dividends and higher share prices. For those who are willing to take the risk to reap the reward, the current share price is very attractive.

Disclaimer: The opinions of the author are not recommendations to either buy or sell any security. Please remember to do your own research prior to making any investment decision.

Source: Annaly Capital: The Road To Higher Dividends Begins Now