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"Whenever I fill out an application, in the part that says, 'If an emergency, notify:' I put 'DOCTOR.' What's my mother going to do?"

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We are going to examine Dynex capital and Annaly capital management in detail. Basically two good companies are being pitted against each other to see which one might be better. We have also provided data on three other plays for investors who might be looking for other ideas. At the end of the article we will offer our opinion as to which one is better.

Reasons to be bullish on Annaly Capital Management Inc:

  • A good free cash flow of $378 million.
  • 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).
  • 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 three-year and five year total return of 61% and 72% respectively.
  • 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 few years but took a big hit in 2011.
  • It has an acceptable interest coverage ratio of 1.8.
  • A strong five year dividend average of 13.12.
  • An excellent five year dividend growth rate of 15.6%.
  • It has a strong free cash flow yield of 15.87%.
  • Since its IPO in 1997, NLY has paid out over $ 7 billion in dividends.
  • 100K invested for 10 years would have grown to $169K.

Reasons to be bullish on Dynex Capital:

  • A strong yield of 12.3%.
  • A good five year average dividend yield of 8.5%.
  • A positive levered free cash flow of $29.7 million.
  • A five-year dividend growth rate of 38%.
  • A five-year cash flow average of 0.97.
  • Net income more than doubled from $18 million in 2009 to $40 million in 2011.
  • EBITDA increased from 20 million in 2009 to $72 million in 2011.
  • Cash flow per share increased from $1.28 in 2009 to $1.79 in 2011.
  • Sales surged from $37 million in 2009 to $83 million in 2011.
  • Annual EPS before NRI increased from 0.40 in 2009 to $1.03 in 2011.
  • A good five year sales growth of 12.52%.
  • A very strong quarterly earnings growth rate of 49%.
  • A great quarterly revenue growth rate of 40%.
  • Excellent profit margins of 66%.
  • Operating margins of 83%.
  • A decent interest rate coverage ratio of 2.7.
  • A very strong free cash flow yield of 18.9%.
  • $100K invested for 10 years would have grown to $267. If dividends were reinvested the rate of return would be much higher.

Long-term debt-to-equity ratio is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balance sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase, the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt. The cash flow is what pays the bills.

The payout ratio tells us what portion of the profit is being returned to investors. A payout ratio over 100% indicates that the company is paying out more money to shareholders than they are making. This situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for some time. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever. If your tolerance for risk is low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of interest - 5 Appealing Companies: Baidu Our Top Choice.

Current Ratio is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa. Lower ratios are generally more attractive. If a company generated $400 million in cash flow and then spent $100 million on capital expenditures, then its free cash flow is $300 million. If the share price is $100 and the free cash flow per share is $5, then the company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry. This gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Levered free cash flow is the amount of cash available to stock holders after interest payments on debt are made. A company with a small amount of debt will only have to spend a modest amount of money on interest payments, which in turn means that there is more money to send to shareholders in the form of dividends and vice versa.

Interest coverage is usually calculated by dividing the earnings before interest and taxes for a period of one year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article - 5 REITs To Consider: Federal Realty Investment Trust.

Company: Dynex Capital Inc (DX)

Levered Free Cash Flow = $29.7 million

Basic Key ratios

  1. Percentage Held by Insiders = 7.25
  2. Relative Strength 52 weeks = 53
  3. Dividend 5-year Growth = 38.03
  4. Cash Flow 5 -year Average = 0.97
  5. Dividend Yield 5-Year Average = 8.5

Growth

  1. Net Income ($mil) 12/2011 = 40
  2. Net Income ($mil) 12/2010 = 29
  3. Net Income ($mil) 12/2009 = 18
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 35.08
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 49.35
  1. EBITDA ($mil) 12/2011 = 72
  2. EBITDA ($mil) 12/2010 = 36
  3. EBITDA ($mil) 12/2009 = 20
  4. Net Income Reported Quarterlytr ($mil) = 14
  5. Annual Net Income this Yr/ Net Income last Yr = 35.09
  6. Cash Flow ($/share) 12/2011 = 1.79
  7. Cash Flow ($/share) 12/2010 = 1.21
  8. Cash Flow ($/share) 12/2009 = 1.48
  1. Sales ($mil) 12/2011 = 83
  2. Sales ($mil) 12/2010 = 49
  3. Sales ($mil) 12/2009 = 37
  1. Annual EPS before NRI 12/2007 = 0.4
  2. Annual EPS before NRI 12/2008 = 0.91
  3. Annual EPS before NRI 12/2009 = 1.02
  4. Annual EPS before NRI 12/2010 = 1.41
  5. Annual EPS before NRI 12/2011 = 1.03

Dividend history

  1. Dividend Yield = 12.46
  2. Dividend Yield 5 Year Average 12/2011 = 8.5
  3. Dividend Yield 5 Year Average 09/2011 = 8.5
  4. Annual Dividend 12/2011 = 1.09
  5. Annual Dividend 12/2010 = 0.98
  6. Forward Yield = 12.46
  7. Dividend 5 year Growth 12/2011 = 38.03

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.07
  2. Payout Ratio 5 Year Average 12/2011 = 0.73
  3. Change in Payout Ratio = 0.34

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -10.54
  2. EPS Growth Quarterly(1)/Q(-3) = -116.13
  3. ROE 5 Year Average 12/2011 = 13.07
  4. Return on Investment 06/2011 = 1.59
  5. Debt/Total Cap 5 Year Average 12/2011 = 75.81
  1. Current Ratio 06/2011 = 13.07
  2. Current Ratio 5 Year Average = 72.6
  3. Quick Ratio = 13.07
  4. Cash Ratio = 3.7
  5. Interest Coverage = 2.7

Valuation

  1. Book Value Quarterly = 9.2
  2. Price/ Book = 0.98
  3. Price/ Cash Flow = 5.02
  4. Price/ Sales = 6.25
  5. EV/EBITDA 12 Mo = 35.98

Company: Armour Residential (ARR)

Basic Key ratios

  1. Percentage Held by Insiders = 8.9
  2. Relative Strength 52 weeks = 55
  3. Cash Flow 5 -year Average = 0.02
  4. Dividend Yield 5-Year Average = 8.7

Growth

  1. Net Income ($mil) 12/2011 = -9
  2. Net Income ($mil) 12/2010 = 7
  3. Net Income ($mil) 12/2009 = -2
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -244.55
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 220.79
  1. EBITDA ($mil) 12/2011 = 25
  2. EBITDA ($mil) 12/2010 = 10
  3. EBITDA ($mil) 12/2009 = -2
  4. Net Income Reported Quarterlytr ($mil) = 24
  5. Annual Net Income this Yr/ Net Income last Yr = -244.56
  6. Cash Flow ($/share) 12/2011 = 0.27
  7. Cash Flow ($/share) 12/2010 = 0.85
  8. Cash Flow ($/share) 12/2009 = -0.49
  1. Sales ($mil) 12/2011 = 118
  2. Sales ($mil) 12/2010 = 8
  3. Sales ($mil) 12/2009 = 0
  1. Annual EPS before NRI 12/2010 = 1.12
  2. Annual EPS before NRI 12/2011 = -0.15

Dividend history

  1. Dividend Yield = 19.41
  2. Dividend Yield 5 Year Average 12/2011 = 8.7
  3. Dividend Yield 5 Year Average 09/2011 = 8.7
  4. Annual Dividend 12/2011 = 1.41
  5. Annual Dividend 12/2010 = 1.52
  6. Forward Yield = 17.65

Dividend sustainability

Payout Ratio 06/2011 = 0. 66

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -9.4
  2. EPS Growth Quarterly(1)/Q(-3) = 118.18
  3. ROE 5 Year Average 12/2011 = 0.87
  4. Return on Investment 06/2011 = -1.32
  5. Debt/Total Cap 5 Year Average 12/2011 = 17.63
  1. Current Ratio 06/2011 = 1.16
  2. Current Ratio 5 Year Average = 0.79
  3. Quick Ratio = 1.16
  4. Cash Ratio = 1.09
  5. Interest Coverage Quarterly = N/A

Valuation

  1. Book Value Quarterly = 6.76
  2. Price/ Book = 1.01
  3. Price/ Cash Flow = 24.88
  4. Price/ Sales = 8.15
  5. EV/EBITDA 12 Mo = -185.43

Company: Capstead Mortgage (NYSE:CMO)

Basic Key ratios

  1. Percentage Held by Insiders = 1.64
  2. Relative Strength 52 weeks = 67
  3. Dividend 5-year Growth = 24.77
  4. Cash Flow 5 -year Average = 2.08
  5. Dividend Yield 5-Year Average = 12.86

Growth

  1. Net Income ($mil) 12/2011 = 160
  2. Net Income ($mil) 12/2010 = 127
  3. Net Income ($mil) 12/2009 = 129
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 26.25
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 27.07
  1. EBITDA ($mil) 12/2011 = 228
  2. EBITDA ($mil) 12/2010 = 184
  3. EBITDA ($mil) 12/2009 = 159
  4. Net Income Reported Quarterlytr ($mil) = 42
  5. Annual Net Income this Yr/ Net Income last Yr = 26.25
  6. Cash Flow ($/share) 12/2011 = 2.68
  7. Cash Flow ($/share) 12/2010 = 2.63
  8. Cash Flow ($/share) 12/2009 = 2.9
  1. Sales ($mil) 12/2011 = 243
  2. Sales ($mil) 12/2010 = 200
  3. Sales ($mil) 12/2009 = 315
  1. Annual EPS before NRI 12/2007 = 0.19
  2. Annual EPS before NRI 12/2008 = 1.94
  3. Annual EPS before NRI 12/2009 = 2.28
  4. Annual EPS before NRI 12/2010 = 1.52
  5. Annual EPS before NRI 12/2011 = 1.75

Dividend history

  1. Dividend Yield = 13.2
  2. Dividend Yield 5 Year Average 12/2011 = 12.86
  3. Dividend Yield 5 Year Average 09/2011 = 12.86
  4. Annual Dividend 12/2011 = 1.58
  5. Annual Dividend 12/2010 = 1.51
  6. Forward Yield = 13.38
  7. Dividend 5 year Growth 12/2011 = 24.77

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.98
  2. Payout Ratio 5 Year Average 12/2011 = 1.28
  3. Payout Ratio 5 Year Average 09/2011 = 1.28
  4. Payout Ratio 5 Year Average 06/2011 = 1.28
  5. Change in Payout Ratio = -0.3

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -2.44
  2. Next 3-5 Year Estimate EPS Growth rate = 3
  3. EPS Growth Quarterly (1)/Q(-3) = -104.88
  4. ROE 5 Year Average 12/2011 = 17.28
  5. Return on Investment 06/2011 = 1.35
  6. Debt/Total Cap 5 Year Average 12/2011 = 85.7
  1. Current Ratio 06/2011 = 21.46
  2. Current Ratio 5 Year Average = 12.54
  3. Quick Ratio = 21.46
  4. Cash Ratio = 15.9
  5. Interest Coverage Quarterly = 1.64

Valuation

  1. Book Value Quarterly = 13
  2. Price/ Book = 0.99
  3. Price/ Cash Flow = 4.8
  4. Price/ Sales = 4.77
  5. EV/EBITDA 12 Mo = 54.22

Company: Crexus Investment (CXS)

Basic Key ratios

  1. Percentage Held by Insiders = 0.76
  2. Relative Strength 52 weeks = 53
  3. Cash Flow 5 -year Average = 0.37
  4. Dividend Yield 5-Year Average = 6.15

Growth

  1. Net Income ($mil) 12/2011 = 108
  2. Net Income ($mil) 12/2010 = 12
  3. Net Income ($mil) 12/2009 = -1
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = 811.96
  5. Quarterly Net Income this Quarterly/same Quarter year ago = 838.53
  1. EBITDA ($mil) 12/2011 = 51
  2. EBITDA ($mil) 12/2010 = 17
  3. EBITDA ($mil) 12/2009 = -1
  4. Net Income Reported Quarterlytr ($mil) = 42
  5. Annual Net Income this Yr/ Net Income last Yr = 812.37
  6. Cash Flow ($/share) 12/2011 = 0.53
  7. Cash Flow ($/share) 12/2010 = 0.62
  8. Cash Flow ($/share) 12/2009 = -0.06
  1. Sales ($mil) 12/2011 = 106
  2. Sales ($mil) 12/2010 = 15
  3. Sales ($mil) 12/2009 = 0
  1. Annual EPS before NRI 12/2009 = -0.06
  2. Annual EPS before NRI 12/2010 = 0.63
  3. Annual EPS before NRI 12/2011 = 1.61

Dividend history

  1. Dividend Yield = 10.77
  2. Dividend Yield 5 Year Average 12/2011 = 6.15
  3. Dividend Yield 5 Year Average 09/2011 = 6.15
  4. Annual Dividend 12/2011 = 1.13
  5. Annual Dividend 12/2010 = 0.58
  6. Forward Yield = 10.77

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.95

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -11.07
  2. EPS Growth Quarterly(1)/Q(-3) = 1-139.13
  3. Return on Investment 06/2011 = 10.43
  4. Debt/Total Cap 5 Year Average 12/2011 = 17.19
  1. Current Ratio 06/2011 = 27.82
  2. Current Ratio 5 Year Average = 47.02
  3. Quick Ratio = 27.82
  4. Cash Ratio = 5.9
  5. Interest Coverage Quarterly = 523.25

Valuation

  1. Book Value Quarterly = 12.1
  2. Price/ Book = 0.83
  3. Price/ Cash Flow = 18.91
  4. Price/ Sales = 7.43
  5. EV/EBITDA 12 Mo = 11.82

Company: Annaly Capital Management (NLY)

Basic Key ratios

  1. Percentage Held by Insiders = 1.04
  2. Relative Strength 52 weeks = 51
  3. Dividend 5-year Growth = 15.62
  4. Cash Flow 5 -year Average = 2.07
  5. Dividend Yield 5-Year Average = 13.12

Growth

  1. Net Income ($mil) 12/2011 = 344
  2. Net Income ($mil) 12/2010 = 1267
  3. Net Income ($mil) 12/2009 = 1961
  4. 12months Net Income this Quarterly/12 months Net Income 4Q's ago = -72.82
  5. Quarterly Net Income this Quarterly/same Quarter year ago = -63.43
  1. EBITDA ($mil) 12/2011 = 1691
  2. EBITDA ($mil) 12/2010 = 2400
  3. EBITDA ($mil) 12/2009 = 2828
  4. Net Income Reported Quarterlytr ($mil) = 446
  5. Annual Net Income this Yr/ Net Income last Yr = -72.82
  6. Cash Flow ($/share) 12/2011 = 3.17
  7. Cash Flow ($/share) 12/2010 = 3.39
  8. Cash Flow ($/share) 12/2009 = 3.25
  1. Sales ($mil) 12/2011 = 1120
  2. Sales ($mil) 12/2010 = 2635
  3. Sales ($mil) 12/2009 = 3424
  1. Annual EPS before NRI 12/2007 = 1.27
  2. Annual EPS before NRI 12/2008 = 2.2
  3. Annual EPS before NRI 12/2009 = 2.76
  4. Annual EPS before NRI 12/2010 = 2.31
  5. Annual EPS before NRI 12/2011 = 2.57

Dividend history

  1. Dividend Yield = 14.08
  2. Dividend Yield 5 Year Average 12/2011 = 13.12
  3. Dividend Yield 5 Year Average 09/2011 = 13.12
  4. Annual Dividend 12/2011 = 2.44
  5. Annual Dividend 12/2010 = 2.65
  6. Forward Yield = 14.08
  7. Dividend 5 year Growth 12/2011 = 15.62

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.89
  2. Payout Ratio 5 Year Average 12/2011 = 1.04
  3. Payout Ratio 5 Year Average 09/2011 = 1.04
  4. Payout Ratio 5 Year Average 06/2011 = 1.03
  5. Change in Payout Ratio = -0.15

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -12.1
  2. Next 3-5 Year Estimate EPS Growth rate = 2
  3. EPS Growth Quarterly(1)/Q(-3) = 123.53
  4. ROE 5 Year Average 12/2011 = 15.04
  5. Return on Investment 06/2011 = 14.32
  6. Debt/Total Cap 5 Year Average 12/2011 = 3.2
  1. Current Ratio 06/2011 = 0.04
  2. Current Ratio 5 Year Average = 0.04
  3. Quick Ratio = 0.04
  4. Cash Ratio = 0.02
  5. Interest Coverage = 1.80

Valuation

  1. Book Value Quarterly = 16.06
  2. Price/ Book = 0.97
  3. Price/ Cash Flow = 4.93
  4. EV/EBITDA 12 Mo = 8.94

Conclusion

Even though Annaly Capital is a great play, Dynex capital beats it on a host of metrics.

It has the edge in terms of cash flow per share, net income, sales, quarterly revenue growth, quarterly earnings growth, five year sales growth, three year total return and five year dividend growth rates. The only area that NLY leads is in the dividend yield arena - it has a yield of 14% Vs 12.3% for Dynex capital. Note we are not stating that Annaly capital is not a good play, just that Dynex capital might be a better choice. Additionally, $100K invested for 10 years in Dynex capital would have grown to $267 in contrast to $169 in Annaly.

Even though the correction of the past few days appears to be strong, the markets are still overbought and need to let out more steam. Prudent investors would do well to wait for a strong pullback before committing a large amount of funds to this market. A pullback in the 7-12% ranges would qualify as a strong pullback.

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: Annaly Vs. Dynex: Who Is The Champ?

Additional disclosure: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Earnings estimates and growth rate charts sourced from dailyfinance.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com. Consensus estimate analysis table sourced from Reuters.com.