Why Annaly Capital Remains A Good Bet

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 |  About: Annaly Capital Management, Inc. (NLY)
by: Regarded Solutions

It really is remarkable how many articles are written about mREITs overall, and specifically Annaly Capital (NYSE:NLY). Some are positive, some are skeptical and many are simply confusing and inaccurate from a dividend investor's perspective. Let me attempt here to offer my opinion on why NLY is an extremely valuable component of any dividend investor's core portfolio, from a common sense approach.

The Basics

Looking at the PPS over the last 5 years, it has bounced around between $18/share down to about $14/share (for about a day or so) but has a trading range in the mid $16s. If you are looking for a capital appreciation super star, stop reading this now and move on to another sector. It is just not going to happen, in my opinion.

Lets look at the dividend yield over the same period. It has averaged a yield of roughly 13.20% with a trailing yield of 14.80% and a current forward yield of 13.75%. I anticipate that the yield will drop since earnings have dropped. They have NOT dropped drastically, but let's assume that we see another dividend cut from its current $.57/share last quarter to $.47/share with the upcoming announcement any day now.

If that occurs, and it might, the yield at the current PPS would be around 11.50%. Will there be a mass exodus of the stock? Not a chance in my opinion. Will the PPS dip? Maybe. Will NLY stop making money? No way. Would I own the stock here? Absolutely.

Here Are My Reasons

  1. NLY makes its money based on the interest rate spread. When the spread is completely flat or inversed, earnings dry up and new avenues need to be sought out. Right now we are in a zero interest rate environment on the short term until at least 2014 if not longer. The 10 year rate has bounced around between 1.7% to 2.2% for the last year or so, and NLY has still made money. If it did not make money, there would be no dividends per the IRS tax code for all REITs and investors seeking income would dump the stock, faster than a speeding bullet.
  2. The Fed and our government have tried to force banks to refinance, bail out underwater homeowners, lower mortgage payments, stop foreclosures, and basically stop the free market from working. Truth be told, it has hurt to a degree, but nothing has worked. From HARP, to HAMP, to MHAP, to Operation Twist, to the latest nonsense of HARP+ which attempts to reduce mortgage balances. Of course the reduction is only for those mortgage holders who are current and can qualify for the new refinance standards, which eliminates most of the mortgage holders that actually need to have the new deal anyway. Yes, some folks are refinancing, but not the millions upon millions that we are constantly told will happen. It simply is not working!
  3. Pre-payments have risen and has caused NLY as well as other mREITs a challenging environment to navigate, yet the pre-payments also throw cash back into the coffers and can be used for better opportunities as they arise, and the BV of NLY increases, having an inverse affect and the potential for new cash infusions via new stock offerings. A balancing act to be sure, but one that has been deftly managed by NLY, to become the largest mREIT on the planet, even with a more conservative approach.
  4. How about looking at who actually owns shares of NLY? Well, 611 institutions and mutual funds own almost 50% of all shares. That is enormous, and I have not seen any mass exodus from any of these major holders. As a matter of fact, institutions have increased the percentage of shares held by 4.1% from the previous quarter, purchasing nearly 20 million additional shares. Would that have occurred if the business model or dividend power of NLY was disappearing and the PPS were to drop significantly? Or do institutions who seek yield realize that the dividends will continue paying off, and they can safely keep a nice percentage of holdings in their mix, for the benefit of their own customers needs?
  5. The SEC back in September sent out a questionnaire in regards to the special tax status for all REITs. Nothing has happened; results of the survey were supposed to come out 4 months ago, and we have not even heard a whisper. My opinion of this has not changed. Motivated to float the Operation Twist announcement as well as other fancy and fake programs to help the refinance push. Another red-herring failed attempt at stopping the markets from working the way they are supposed to.

When you look at the items I have noted, and there are plenty more to be sure, it is easy to see why there has not been a massive sell-off of NLY shares, nor a panic from individual investors who seek income, and who know that sometimes the dividends are lower and sometimes the dividends are higher, but there has been a track record of success that cannot be disputed. Institutions and mutual funds obviously see the same thing.

My Opinion

It's my opinion of course, but anyone who advises current shareholders to dump all their shares now, with at least 2 more years of a zero interest rate environment, simply has no clue as to what they are talking about.

Shareholders will buy and sell for all sorts of reasons, but one reason not to sell is because the "glory" days of mREITs are now officially over -- based on the opinion of someone who just happens to be short the stock.

If you are a dividend seeking, income needing investor, NLY offers much of what we need, even though it faces risks, and needs to be monitored. I am going to use my common sense here. What are your plans?

Disclosure: I am long NLY.

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.