Seeking Alpha
Profile| Send Message|
( followers)  

Basic overview

Annaly Capital Management Inc (NYSE:NLY) invests in mortgage pass-through certificates, collateralized mortgage obligations, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans. Their paper is implicitly guaranteed by the US government, which limits its credit risk. It is among a select group of companies that has increased its dividends during the economic crisis.

Reasons to be bullish on Annaly Capital Management Inc:

  • A very strong free cash flow of $8.19 billion
  • Net income has been trending upwards for the past three years; net income jumped almost $700 million from 2010 to 2011.
  • While rising rates can be detrimental to the business model of MREITS; the risks can be mitigated through the implementation of proper hedging techniques. As NLY arguably has the best management team in the industry, we feel that they will be able to do well even in a rising rate environment.
  • A strong 3 year and five year total return of 75% and 97% respectively.
  • Even though payout ratios are not important when it comes to REITS, it's interesting to see that it has a payout ratio below 100% (current value=89%)
  • It is one of the few companies that paid out hefty dividends during the downturn of 2008.
  • Operating cash flow has also been trending upwards for the past three years.
  • It has a decent interest coverage ratio of 2.4.
  • A strong five year dividend average of 12.7%
  • An excellent five year dividend growth rate of 22.05%
  • Annaly's leverage has been steadily dropping over the past few quarters. In June 2011, it stood at 5.7:1. On the 30/9/2011, it stood at 5.5:1 compared to 6.4:1 a year ago (30/9/2010)
  • It has a very strong free cash flow yield of 50.9%
  • Since its IPO in 1997, NLY has paid out over $ 7 billion in dividends.
  • 100K invested for 10 years would have grown to $217K.

Annaly Capital Management Inc (NLY)

Industry: REITs

Free cash flow= $8.19 billion

Performance

  • Qtrly Earnings Growth = -63.4%
  • Qtrly Revenue Growth = -58.7%
  • Total return for the past 3 years = 75.04%
  • Total return for the past 5 years = 97.91%
  • Total return for the past 12 months = 7.83%
  • Consecutive dividend increases = 0 years

Growth

Net income for the past three years

  • Net Income - 2011 = $1961 million
  • Net Income - 2010 = $1267 million
  • Net Income - 2009 = $344 million

  • EBITDA ($mil) 12/2011 = $N/A
  • EBITDA ($mil) 12/2010 = $3135
  • EBITDA ($mil) 12/2009 = $3548
  • Sales ($mil) 12/2011 = $1120
  • Sales ($mil) 12/2010 = $2635
  • Sales ($mil) 12/2009 = $3424

Dividend Sustainability

Total cash flow from operating activities

  • 2008 = $1.11 billion
  • 2009 = $10.82 billion
  • 2010 = $10.87 billion
  • Payout Ratio 12/2011 = 89%
  • Payout Ratio 5 Yr Avg 12/2011 = 103%
  • Change in Payout Ratio = -14%

Other Key Ratios

  • Price to Sales = N/A
  • Price to Book = 1.04
  • Price to Tangible Book = 1.03
  • Price to Cash Flow = 4.93
  • Price to Free Cash Flow = 2.6
  • Quick Ratio =N/A
  • Current Ratio = N/A
  • LT Debt to Equity = 0.04
  • Total Debt to Equity = 0.04
  • Interest Coverage = 2.4
  • Inventory Turnover = N/A
  • Asset Turnover = N/A

  • Dividend yield 5 year average = 12.7
  • Dividend rate = $ 2.44
  • Dividend growth rate 3 year avg = 6.17%
  • Dividend growth rate 5 year avg = 22.05
  • Paying dividends since = 1997
  • Total return last 3 years = 75.04%
  • Total return last 5 years = 97.91%

Related companies (peer group analysis)

CYS Investments, Inc. (NYSE:CYS)

Industry: REITs

Free cash flow= $-4.5 billion

Net income for the past three years

  • Net Income - 2011 = $64 million
  • Net Income - 2010 = $22 million
  • Net Income - 2009 = $292 million

Total cash flow from operating activities

  • 2009 = $-880.74 million
  • 2010 = $-2483.4 million
  • 2011 = $-4516.9 million

  • Dividend yield 5 year average = 15.05
  • Dividend rate = $ 2.25
  • Dividend growth rate 3 year avg = 0%
  • Dividend growth rate 5 year avg = N/A
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2009
  • Total return last 3 years = N/A
  • Total return last 5 years = N/A

ARMOUR Residential REIT Inc. (NYSE:ARR)

Industry: REITs

Free cash flow= $77 million

Net income for the past three years

  • Net Income - 2011 = $-2 million
  • Net Income - 2010 = $7 million
  • Net Income - 2009 = $N/A million

Total cash flow from operating activities

  • 1900 = $0 million
  • 2009 = $-2.61 million
  • 2010 = $9.17 million

  • Dividend yield 5 year average = 8.08
  • Dividend rate = $ 1.32
  • Dividend growth rate 3 year avg = 0%
  • Dividend growth rate 5 year avg = N/A
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2010
  • Total return last 3 years = 8.18%
  • Total return last 5 years = N/A

Two Harbors Investment Corp (NYSE:TWO)

Industry: REITs

Free cash flow= $109 million.

Net income for the past three years

  • Net Income - 2011 = $-9 million
  • Net Income - 2010 = $36 million
  • Net Income - 2009 = $127 million

Total cash flow from operating activities

  • 1900 = $0 million
  • 2009 = $-11.37 million
  • 2010 = $33.12 million

  • Dividend yield 5 year average = N/A
  • Dividend rate = $ 1.60
  • Dividend growth rate 3 year avg = 0%
  • Dividend growth rate 5 year avg = N/A
  • Consecutive dividend increases = 1 years
  • Paying dividends since = 2009
  • Total return last 3 years = 46.28%
  • Total return last 5 years = N/A

Hatteras Financial Corp (NYSE:HTS)

Industry: REITs

Free cash flow= $334 million.

Net income for the past three years

  • Net Income - 2011 = $ million
  • Net Income - 2010 = $ million
  • Net Income - 2009 = $ million

Total cash flow from operating activities

  • 2008 = $77.32 million
  • 2009 = $181.79 million
  • 2010 = $176.27 million

  • Dividend yield 5 year average =
  • Dividend rate = $ 3.90
  • Dividend growth rate 3 year avg = 15.71%
  • Dividend growth rate 5 year avg =
  • Consecutive dividend increases = 0 years
  • Paying dividends since = 2008
  • Total return last 3 years = 74.13%
  • Total return last 5 years = N/A

Conclusion

The Feds have extended the low-interest holiday period, and in general this should prove to be beneficial to this sector. With a proper hedging strategy in place REITS can perform well even in a rising rate environment; as NLY has one of the best managements teams around, we feel that they will hedge their bets wisely and continue to deliver above-average dividends for their investors. Management astutely begun deleveraging several quarters ago. As the markets are extremely overbought our advice to long-term investors would be to wait for a strong pull back before jumping into the market.

Total return, including dividend reinvest chart of NLY obtains from annaly.com. EPS, Price, EPS surprise charts obtained from zacks.com. Dividend history charts sourced from dividata.com. Free cash flow yield and cash dividend payout ratio charts sourced from Ycharts.com. Earning Vs expectation charts sourced from smatmoney.com.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware.

Source: Is Annaly Capital A Good Long Term Play?