Annaly Capital Management (NLY) has been one of our favorites for quite some time. But recently, American Capital Agency (AGNC) has caught our attention. This article presents the compelling advantages AGNC holds over NLY in both financial and business metrics. We have ignored economic conditions like shrinking spreads as they are common to almost all REITs. This evaluation is critical right now as the news about NLY's dividend will be out any time soon, as the last ex-dividend date was Dec .27, 2011.
PE Ratio: NLY is trading at 43 times earnings as its EPS has been shrinking continuously over the past few quarters. AGNC appears ridiculously cheap at about 6 times earnings.
Payout Ratio: While REITs always have a high payout ratio, NLY's current payout ratio (current dividend/current EPS) is an out of the world 616%. AGNC's payout ratio is a more manageable 99%. That leads us to the next point.
Current Yield: For those looking at establishing new positions or even adding to their existing positions, the current yield in AGNC of 17 is higher than NLY's 14. Also the payout ratio suggests NLY's current dividend will have to be cut.
Mike Farrell: It was announced in January 2012 that NLY's CEO Mr. Mike Farrell was undergoing treatment for cancer. Long time NLY investors stayed put with NLY because they knew Mr. Farrell is one of the best in the business. While NLY said the cancer is treatable and that Mr. Farrell will continue his duties, one cannot deny the challenges such situations create on the company and its performance.
Profitability Metrics: AGNC just blows NLY away if we look at profitability metrics like profit margin and operating margin. Also, AGNC's cash/share comes in at about 33%, while NLY's is about 18%. Please refer the table below, sourced from finance.yahoo.com.
Openness/Shareholder Interest: ANGC seems more open than NLY to disclose its entire financial situation and portfolio holdings. The most important factor in a REIT for investors is the dividend but some red flags have been raised on how NLY's executive compensation is structured detrimental to the dividend.
Conclusion: Though NLY has been around for a long time and has performed very well for early shareholders, it may be time to look for alternatives if you are interested in setting up new position or add more in this sector. AGNC is one of the most compelling alternatives out there. For those who have been in NLY for a long time though, your cost basis and reinvested dividends would be enough of a cushion to ride through the tough times. However, AGNC's stronger financials and NLY's woes are too powerful to ignore, in our opinion.
Additional disclosure: We held NLY till recently but sold off after a series of bad news and increasing worries about the dividends.