I have been getting emails and direct messages from concerned shareholders of Annaly Capital (NLY), about the recent pullback in the PPS.
First, we should take a fast look at the chart:
Yesterday's dip was the largest in awhile and I will go over my opinion as to why it occurred in a moment.
First let me point out some facts about the share price:
- Annaly is NOT purchased for its capital appreciation and "value" of its PPS. It is a dividend stock in the mREIT sector that on an overall basis does not move very much in either direction unless there are extraordinary issues, which there has not been of late.
- In October of 2011 it dipped to $15.48/share. On February 7th it reached $17.12/share, and is now at $16.15/share. To me that is a fairly tight trading range given the last ex dividend, and the usual run-up prior to announcing the next dividend.
- Given these observations the PPS has basically flat-lined. Given the headwinds that the mREITs have been facing, that seems pretty darn good in my book.
What Is Going On?
There have a few analyst downgrades, from market "outperform" to market "perform." What is the significance of these? Nothing in my opinion. It means they are not recommending that people sell the shares. That seems silly to me because most shareholders of Annaly hold the shares for the dividend anyway.
I actually LIKE a market perform rating because it tells me that in our recovering economy, a stock will perform with the market. That's fine with me. I am not selling the shares if the PPS pops up to $18 anyway (or $20, etc). If it soars to $30/share I might take some profits.
There have been some "scare" headlines of late such as the one this article has used. There was nothing new in the article of course, and since we now know that the latest "push" to refinance is about lowering the upfront costs, it is much ado about nothing in my opinion.
As I have consistently pointed out, (read this) every program the government has attempted has fallen flat.
"The fed and our government have tried to force banks to refinance, bailout 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."
Also, please note that the largest shareholders are funds and institutions, also spelled out in my previous article:
"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?"
Looking at the facts objectively and realizing that Annaly takes a more conservative approach in its business model, one can easily see that nothing has really changed from last week to this week.
Perhaps a reaction to the "downgrades?" Perhaps a reaction to a potential dividend cut which would make sense given the IRS mandate and the reduction in earnings? Maybe some of the scary headlines have made some investors squeamish.
I am not sure if institutions have bailed out, but I would think if they did sell some shares, it would not be of any magnitude that would spell disaster.
Why not just take a deep breath and relax. Owners of Annaly Capital shares know why they really own it and even if the dividend yield drops to 10%, it is my opinion that the core shareholders will keep the shares.
Pre-payments are not happening at the pace that people fear but it does impact earnings, yet also tosses cash back into the register to increase BV and to be used for better opportunities as they arise.
I am not buying adding any shares to speak of right now unless the PPS drops some more, but I am not selling one share.
What are you doing?
Disclosure: I am long NLY.