Back in March, this article compared the basics of two of the most popular REITs, Annaly Capital Management (NLY) and American Capital Agency (AGNC). Since a lot has happened in these 6 months, it's time to re-run the numbers. Let us take a look at some of the most important happenings with respect to these stocks.
- Another Dividend Cut: Annaly once again cut its dividend for the September payout - going from 55 cents a share to 50 cents a share. The dividend has been going down continuously at Annaly. While investors could see that as the company being conservative, the dropping yield is a cause of worry. After all, one holds REITs for their high dividends. The chart below shows Annaly's yield falling since the beginning of 2011. This is not due to an increase in share price, however. Just plain dividend cuts.
- Lowest Yield: While a 11.9% yield is nothing to laugh at, Annaly's current yield is the lowest amongst the popular REITs- including AGNC, Chimera Investment Corp (CIM) and American Capital Mortgage (MTGE) to name a few. AGNC, on the other hand is at 14.5%, much lower than the 17% mentioned in the original article linked above. This is mainly due to the run up in share price.
- Analysts: For what its worth, Annaly in particular has been hit hard by the analysts downgrading it. Sure, some times these downgrades create great buying opportunities but it's not a false statement to say Annaly is no stranger to downgrades these days. AGNC, in the same time period saw one downgrade to "Hold". In the image below, the first table is NLY's and the second is AGNC's.
- Ben Bernanke: What is a discussion on REITs worth if it does not talk about Fed and the low interest rate scenario. The QE3 is generally bullish for these companies, and AGNC's higher leverage might be a good decision in hindsight, as this is probably the best time to borrow, but shrinking margins are a general concern for all the players now.
- Basic Numbers: As stated in the original article, AGNC continues to hold the edge over NLY in terms of PE, payout, operating margin and profit margin. Especially concerning should be the dividends per share vs the earnings per share for Annaly - that is the payout. One number in favor of Annaly is that it is trading very close to its book value per share.
- Mike Farrell: Last but certainly not the least, investors have been worried about NLY's CEO Mike Farrell's health. While the company hasn't made a lot of information public or updated us frequently, the latest to come out of the camp is that he is fighting his cancer like a true warrior. That is good news for investors and also generally on humanitarian grounds. It helps when your CEO is the most respected name in the field.
- Conclusion: While the REITs space overall seems like the place to be with Fed's backing, we suggest investors to stick with the tried and tested names like NLY and AGNC over newer names. In spite of the mentioned drawbacks, NLY is all set to yield at least 10% even if the dividend is cut more in the future. However, if forced to pick one of these two over the other, we would still stick with AGNC for the higher yield and profitability metrics. It has clearly outperformed NLY over the past couple of years. Its main negative is that its more leveraged than NLY and seems more risky, but with QE3 and perhaps some more to follow, AGNC might be able to ride out the risks.