Annaly: This High-Yield Stock Is A Buy On The Next Dividend Cut

 |  About: Annaly Capital Management, Inc. (NLY), Includes: CIM
by: Trade In Mexico

Mortgage real estate investment stocks have provided excellent yields for years. But, the sector is not without risks. One of the chronic pitfalls in the past for this sector has been secondary stock offerings, which many companies have announced in order to raise capital. The other common pitfall for this group has been dividend cuts. When these companies see mortgage pre-payments, or other factors that could impact financial results, it is often necessary to reduce the distributions to shareholders.

When mortgage REIT companies announce a secondary offering or a dividend cut, the stock usually declines which can create a buying opportunity for those willing to act quickly. Buying the dips in this sector has generally been paying off and in spite of the risks and challenges this industry faces, income hungry investors continue to bid up these stocks. Many of them are trading at or near 52-week highs and this trend is likely to continue because these stocks offer yields that are almost impossible to match with traditional investments.

Recently, Annaly Capital Management (NYSE:NLY) was downgraded by FBR Capital Markets, from "market perform" to "underperform". The company also set a $16 price target. A recent Barron's article summarizes the reasons for the downgrade, and it states:

Due to Annaly's portfolio size, we believe the company is significantly more exposed to higher prepayments than several other agency mortgage real-estate investment trust (mREIT) peers, particularly those with a similar tilt to fixed-rate mortgage-backed securities (MBS).

While Annaly shares are likely to drop if a dividend cut is announced, I think investor demand for high-yielding stocks is so strong that a drop to $16 is not probable. Based on recent history, investors who patiently wait for a dividend cut and buy on the dip will probably put themselves in a strong position to not only earn yield, but possibly also see some capital gains as the stock could rebound from what might only be a short-term hit. Annaly Capital is generally considered to be one of the best-managed mREIT stocks, and it has even received buy ratings from Jim Cramer. Those willing to speculate with higher risks could consider Chimera Investment (NYSE:CIM), another mREIT stock that is managed by Fixed Income Discount Advisory Company, a wholly owned subsidiary of Annaly Capital Management, Inc. Chimera is one of the few mREIT stocks that is not trading at or near 52-week highs, but rather it is near 52-week lows because the company has not filed financial reports on a timely basis with the SEC. Chimera says it has delayed filings because it "is reviewing its non-Agency residential mortgage-backed securities portfolio to determine the treatment under GAAP according to ASC 320....." If the company does get the filing issue resolved the stock could be poised for a major relief rally.

Key Data Points For Annaly From Yahoo Finance:
Current Price: $16.80
52-Week Range: $14.65 to $18.45
Dividend: $2.20 annually, which yields 12.8%
2012 Earnings Estimate: $1.93 per share
P/E Ratio: about 8 times earnings

Key Data Points For Chimera From Yahoo Finance:
Current Price: $2.88
52-Week Range: $1.81 to $3.30
Dividend: 36 cents annually, which yields 16.7%
2012 Earnings Estimate: 45 cents per share
P/E Ratio: about 7 times earnings

Data sourced from Yahoo Finance. No guarantees or representations are made.

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

Disclaimer: Please consult a financial advisor before making investments.