Annaly: What Is Going On? (Part 3)

Mar.21.12 | About: Annaly Capital (NLY)

I feel like this is the trilogy of a movie that keeps getting better and wins all of the awards. Annaly (NYSE:NLY) announced its dividend "cut" yesterday after the close and it went from $.57/share all the way down to an "embarrassingly low" of $.55/share. (Read the announcement here)

This translates into a "Bris" more than a "cut" for all intents and purposes. The dividend was snipped less than 1/2 of 1% and based on the current PPS looks like a yield of about 14%.

All of the folks who have recommended everyone sell all of their shares in NLY have been seriously off the mark in my opinion.

I respect the authors here on SA but some have made bold remarks such as everyone should "RUN" from Annaly and other mREITs because the business model is over and cannot work any longer.

While it is true that rising interest rates will impact earnings in this sector, the fact of the matter is that the Fed has given us an open play book with its ZIRP (zero interest rate policy) until at least late 2014. Could the Fed renege on that? Of course, but i doubt it will. Unemployment is still high and although we are in recovery economically, it is not robust.

Any increase in short-term rates could place a clamp on a fragile recovery and I do not believe there will be any hikes for the immediate future.

Just as important is the rise in the longer-term yields. The 10-year Bond is at about 2.45%,(further higher rates might be ahead also) and the 30-year is nearing 4.0% (read this). While some of the more aggressive mREITs have opted for gains now, rather than prudence and a conservative approach for the long haul, Annaly has chosen to de-lever and hold cash for precisely this opportunity in the spread between the 2-year bond and the 10-year bond, now over 2%.

This is where Annaly has thrived and generated income at its best.

I can also see a short-term trend upward in the PPS, but that is not what is important to shareholders. It is all about the dividend, which is the main reason why 87% of Annaly shares are held by institutions. Dividends for their clients.

I do not have a crystal ball by any means, and there are risks that surround mREITs, which I have noted far too often, as there are risks in any stock market investment. However I do believe we could see dividend HIKES for the next few quarters at the least.

My opinion has now been supported by fact, and recent developments. I am still a holder and even potentially a buyer to add to my position here.

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.