It seems as though I write something about Annaly Capital (NYSE:NLY) just about every few minutes. I suppose it comes with the territory when I have been supportive of the stock since I began writing for Seeking Alpha on 10/10/2011.
Since that time all mREITs have faced significant headwinds and the bottom lines have been the same for just about all of them. More pre-payments, tighter yield curves, reduced dividends.
Of course along with those issues we also have more cash available from the pre-payments, a higher book value and an open playbook from the Fed to keep short term rates near zero at least through 2014.
Today, NLY released its earnings for the quarter, as well as the full year (read the report here), and earnings came in light. I did expect that result and it did not surprise me. Nothing was mentioned about cutting the dividend at this point; however, I anticipate another slice taken of perhaps 5-10% or $0.49-$0.53/share for the next dividend. Any less of a cut would be a surprise to me, and while a somewhat deeper cut could occur, I do not anticipate it (I personally am OK with an 8% yield by the way).
The upside is that NLY's BV is now increased, probably delaying a secondary stock offering somewhat, and the PPS will be less than the current 1.04% of BV, giving some leverage to maintain the PPS. The extra cash on hand can also be deployed to take advantage of opportunities that may occur, and has been more conservative than others in the sector which I believe to be most important as we navigate during this low interest rate environment and flatter yield curve.
As Mike Farrell (Chairman, CEO) stated in the report;
"Participants in the global financial system continue to grapple with many issues in the market: sovereign credit risk here and abroad; a relatively weak global economic outlook; the uncertain pace and extent of regulatory reform; the potential policy decisions of central banks; and reduced investment return expectations in an extended period of low interest rates. In this environment, I believe that it is best to be conservative in our approach to risk and performance. It is intended not only to protect our portfolio but also to prepare us to take advantage of opportunities as they arise."
Wellington Denahan-Norris (Vice Chairman, CIO, COO) stated;
"We continue to manage our company conservatively. During the quarter, in our portfolio we saw prepayment speeds increase slightly, took advantage of market opportunities to harvest gains, and maintained a prudent level of leverage. After taking into account the effect of interest rate swaps, our portfolio of mortgage-backed securities and Agency debentures was comprised of 42% floating-rate, 9% adjustable-rate and 49% fixed-rate assets."
Personally I view the overall report as positive in the current environment, and NLY has been able to continue to make a profit. Even if the profit is less than before, the murky waters that it had to navigate through made it more difficult and I see the entire year as impressive and continue to be comfortable with the risk reward.
It will be interesting to see what the actual dividend will be this time around and even though it will most likely be cut, I cannot find another stock that offers the yield of NLY, for the amount of risk taken.
I also believe that the yield curve will widen at some point when fixed income investors continue to see the S&P far outperform fixed-income securities, and move a mountain of cash from Treasuries to equities.
As that natural process occurs, NLY could just as swiftly have greater revenues, and increases in dividends.
I am continuing my personal position in NLY as of now.
Disclaimer: Please remember to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any securities or stocks and is the opinion of the author.
Disclosure: I am long NLY.