Annaly: Bullet-Proof Dividend Thanks To Convertible Senior Notes

May.15.12 | About: Annaly Capital (NLY)

Annaly Capital Management (NYSE:NLY) has what it takes to rise given the recent news that surrounds it.

The most recent news has it that Annaly Capital announced a public offering of $750 million in an aggregate principal amount of its 5.00% convertible senior notes that will be due in 2015. It was said that Annaly had given the underwriters of the notes an option to buy up an additional $112.5 million aggregate principal amount of the said notes if there is any in the next 30 days.

This move is surely set to lead to a bullish trend for Annaly given that fact that it has plans of using the proceeds of its present offering to buy securities that are mortgage backed. These mortgage-backed securities are intended to be used as a way of increasing its investment portfolio and also to be used for other corporate purposes such as the retirement of some long-term debts, increased investments and also for the repayment of short-term debts.

While the sales of convertible notes is something that every REIT could do, the plans set forth by Annaly for the utilization of the proceeds will ensure that the move takes it to greater heights. For one, an increase in its investment portfolio will surely lead to an increase the streams of income and invariably lead to increased revenue for Annaly.

Another point is that the retirement of its long-term debts will ensure that the interest payable on such debts is used for other productive purposes. More so, the repayment of short-term debts will also have the same effects while being free of debts also goes a long way in removing the uncertainties that usually surround the liquidity of the collaterals that are used to secure such debts.

Other news that testifies to the rising trend for Annaly and which will surely make it rise further is the fact that it recently got an upgrade from some analysts. For instance, analysts at Citigroup recently issued a note that raised the estimated earnings per shares to $15.00 as well as a "neutral" rating in the buy or sell debate.

It should be remembered that Annaly outperformed the estimates of analysts in the last fiscal quarter by reporting an earning if $0.54 per share as opposed the estimated $0.48 figure that analysts had given. This showed that Annaly Capital surpassed the estimates with a clean and clear earnings report. Interestingly, the general consensus among analysts is that Annaly will have earnings of $0.48 per share in the next fiscal quarter. However, if Annaly's performance in the last quarter is an indication of what to expect in the next quarter, I strongly believe that Annaly will once again outperform the estimates of the experts.

Recently, some analysts have claimed that if Annaly is unable to roll debts or if it has reasons to post additional collateral that its liquidity is in danger of being impaired. However, the news of the convertible senior notes being sold by Annaly shows that it has a plan to take a definitive action to retire and repay both long-term and short-term loans.

There are also worries that it will be difficult for Annaly to maintain its dividend yield at current levels if it should experience a prolonged period of low interest rates. However, my reaction to this is that it is still too early to project what such an event can have on the stock. Yet, it is safe to say that such an occurrence will not pose to much of a problem because the management at Annaly is forward thinking and would most likely have a plan in place to address such a situation.

Interestingly, I find it somewhat funny that REITs are now performing brilliantly such that they are surpassing all expectations and the projections given by analysts. For instance, Invesco (NYSE:IVR) in the last quarter recorded a net income way above the expectations of Wall Street in the last fiscal quarter. Invesco, just like Annaly, also invests in residential and commercial mortgaged-backed securities.

In the last quarter, Invesco surpassed analysts' recommendations with a margin of $0.07 beating the Wall Street prediction of $0.65 per share to trade around $0.72 per share. In the words of Richard King who is the President and Chief Executive Officer "We're pleased to report we were able to successfully accomplish all four of our major first-quarter objectives,". He also went further to say "We continued to improve book value, provided a stable dividend, reduced credit leverage, and increased our earning assets through the improvement seen in the company's equity position. As a result, we have strengthened our balance sheet and significantly improved our risk position while remaining focused on providing dividend stability in this market environment."

However, other competitors such as Chimera (NYSE:CIM) one of the REITs that owns a remarkable number of non-agency mortgage security have experienced leverage to equal about three times the assets that they had earlier this year. In another development, another arm of REITs such as Public Storage (NYSE:PSA) is also set to maintain a bullish trend. For one, the overhead running costs of Public Storage are minimal and with a strong demand for the service, profitability is sure to increase with time.

Annaly continues to perform well, thanks to creative and innovative ways of raising capital. Look for this to continue and for the company to remain on the higher end of its competition. It is a closely watched company for many reasons, including its ability to make astute and wise moves. Annaly has made several investors happy in the past, and my expectations is that it will keep doing so. Watch what the company itself invests in with the money raised from its recent public offering. The moves should be wise and secure, and should encourage confidence in Annaly investors.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.