Annaly: Is A Dividend Increase At Hand?

Jun.13.12 | About: Annaly Capital (NLY)

I recently wrote an article on Annaly (NYSE:NLY), which reflected some of the concerns of a tightening yield curve. The article can be reviewed here. While at the time the 10-year treasury bond was yielding roughly 1.46%, little did I realize that a sharp turnaround would occur so soon.

Click to enlarge

CBOE Interest Rate 10-Year T-No (^TNX)

This chart shows how just yesterday the yield went from 1.62% to 1.66% which is a large move in one day. I would suggest that not only does this bode well for Annaly, as well as other mREITs, but could also signal a distinct possibility that going forward all of them could increase profitability, especially NLY. Since Annaly has played a more conservative "game", and seems to have stayed within the 2-10 year yield spread, a continued flow of funds from those treasuries into equities or elsewhere, will widen the spread even further.

The money flows from fixed incomes into equities has obviously picked up steam over the last few weeks simply because the yields act inversely to actual bond prices. As investors sell, bond prices go down, but yields go up.

The effect of a widening spread means that mREITs such as Annaly, as well as American Captial Agency (NASDAQ:AGNC), and others could increase profits, and by virtue of the IRS tax laws that all REITs must follow, roughly 90% or more of their profits must be returned to shareholders in the form of dividends.

An Increase In Dividends From Annaly?

We need only look at the current rise in share price of Annaly to see that buyers of the shares are driving the price up.

Annaly Capital Management, Inc. (<a href='http://seekingalpha.com/symbol/NLY' title='Annaly Capital Management, Inc.'>NLY</a>)

On March 28th, the share price was $15.57 and now stands at $16.78/share - 4-month high. Not only that, but the recent insider stock purchases by just about all of the major executives, including Mike Farrell, gives us a clue that they feel that not only is there a good chance for capital appreciation, but perhaps the current dividend is not merely safe, but could be in for an upward surprise.

American Capital Agency just reported that its dividend for this quarter is staying the same and I expect that Annaly will report the same, if not better news.

Since Annaly has been delivering and building up cash to deploy at opportunities to deliver better results (as well as prepare for any macro economic changes that could impact its business), it seems possible to me that in the next few quarters if the flow of money out of treasuries pushes the spread wider, we could see an increase in dividends paid out by Annaly, sooner than later.

The changes that have been occurring so swiftly in the bond market could reverse, but given the recent trend I would say that the chances are quite good that the 10-year treasury yield could go back over 2% quite soon. That would mean significant increases in Annaly's profitability.

My Opinion

Keep an eye on the share price, and while we do usually see a run up in price prior to the ex-dividend date, this time around there are other dynamics occurring, such as insider purchases and a better outlook.

It is prudent to continue to stay tuned for any sudden changes or more government intervention that could impact future earnings, but to me, it appears that Annaly could be entering into a sweet spot for now. Rising share prices ahead of a possible increase in dividends? Time will tell.

Disclosure: I am long NLY.