Annaly: A Funny Thing Happened While The Boo Birds Sang

Apr.21.12 | About: Annaly Capital (NLY)

One thing I like about Seeking Alpha is that they keep articles written by me forever. A new reader can easily find an old article and bring it up when a new one emerges and notes can be compared.

Not only do they save my articles but SA saves every author's articles. In the case of Annaly Capital (NYSE:NLY) any investor who would like some solid information can review all the articles and make an informed decision on whether or not they want to own shares.

My last article on Annaly can be read here where I review my consistent positive position about NLY, and why I have it. I have not varied from my viewpoint from the very first day I wrote about Annaly for Seeking Alpha (check it out here).

In basically all of my articles I outline the risks associated with mREITs as well as the rewards and the fabulous track record that Annaly has had since I have owned it since 1999.

Some authors have described Annaly as a "cult" stock. I disagree, for the following reasons:

  • The spread IS what counts for mREIT shareholders and Annaly has been deftly navigating all of the spreads for as long as they have been around.
  • NLY made money when the spread was flat and even a bit of money when the yield curve was inverted (the mid to late 90's)
  • Annaly has made money when interest rates were high (the 10 year Treasury was close to 6% in 1997,98 and 99, while the 2 year was almost identical at 5.75-5.95%).
  • Annaly has made money during the period we are in right now, even though it has been less than the really strong periods of 2000-2006.
  • The ZIRP (zero interest rate program) is still intact and has been upheld in the most recent FOMC meetings and notes.
  • Annaly has paid consistent dividends, some much higher and some much lower, but never missing a beat.

Now we can take a look at today's chart:

Annaly Capital Management, Inc. (<a href='' title='Annaly Capital Management, Inc.'>NLY</a>)

As of this writing we can see that the share price is about $16.00 and has made up $.33/share of its dividend of $.55/share since it went ex- dividend on March 28th.

As everyone knows, I am not that concerned with the share price as long as Annaly keeps making money and paying me that sweet dividend check.

Anyone who might be thinking about owning shares, should know the major risks of an mREIT before they take the plunge:

  • A rapid rise in interest rates while the fed goes back on its ZIRP position
  • Increases in pre-payments which will inhibit earnings BUT place more cash in the register (which raises book value anyway)
  • A flat or inverted yield curve which cramps earning ability

Those are the major issues facing all mREITs, and Annaly is not immune. That being said, they have proven time and again, without fail, to produce earnings, and pay dividends.

Those fortunate enough to have owned the shares since 1998/99, have a negative cost basis when all of the dividends have been added up. The checks also still keep coming. Perhaps it can still be done!

My Opinion

I believe that for at least the next 2-3 years, Annaly can perform even better than it has been. I also believe that given the moderate economic recovery, the Fed will not abandon its ZIRP policy, and therefore mREITs will continue to profit. Longer term interest rates have risen recently (as in mortgage rates) which could dampen some of the prepayment risks for now, and the spread between the 2 year Treasury and the 10 year is fluctuating between 160 basis points and 225 basis points.

Annaly has de-levered deftly, has smoothed out some bumps in its portfolio, and has the cash to deploy when the timing is right.

The timing seems right to me.

Disclaimer: Please be sure to do your own research prior to making any investment decisions. This article is not a recommendation to buy or sell any security and is strictly the author's opinion.

Disclosure: I am long NLY.