Analyzing Annaly Capital Through Different Interest Rate Cycles

Jun.17.11 | About: Annaly Capital (NLY)
Mortgage REITs have received a significant amount of press lately, given the rich yields they have been providing investors in a low interest rate environment. We have written positive articles on a few of the large mortgage REITs, here and here.
That said, we have been most bullish on Annaly Capital Management, Inc. (NYSE:NLY) due to its size and, most importantly, longstanding tenure of the management team.
The primary risk factor most naysayers have regarding mortgage REITs is the significant leverage inherent in their business models as well as their exposure to a rising interest rate environment. Despite these risks, we believe NLY's management team has proven its ability to manage the company through interest rate cycles.
The three charts below (adjusted share price, dividend yield, and price to book value) will help investors analyze the company’s performance over different interest rate environments. Over a 14-year tenure, NLY’s management team has delivered shareholders strong returns outpacing the S&P 500.
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NLY has had an average dividend yield of 11.4% since 1998. Despite troughing around 3.1% in 2005-06, the dividend adjusted share growth was very strong.
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NLY is currently trading around its historical average P/BV of 1.20x.
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NLY and MFA Financial (NYSE:MFA) remain our two main REIT holdings due to their strong management teams. However, we also have a small position in American Capital Agency Corp. (NASDAQ:AGNC).
We continue to believe that the best strategy for investing in this space is to own a portfolio of mortgage REITs to diversify your risk. That said, the following REITs are currently on our watchlist and we are following them very closely: Chimera Investment Corp. (NYSE:CIM), Anworth Mortgage Asset Corp. (NYSE:ANH), Hatteras Financial Corp. (NYSE:HTS), and Capstead Mortgage Corp (NYSE:CMO).
Disclosure: I am long NLY, MFA, AGNC.