Annaly Capital's BV, Dividend, And Valuation Compared To 19 mREIT Peers (Post Q4 2015 Earnings) - Part 2

| About: Annaly Capital (NLY)
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Summary

This article compares NLY’s recent dividend per share rates, yield percentages and several dividend sustainability metrics to nineteen mREIT peers.

This article also explains why NLY had a stable dividend for the first quarter of 2016 (which I correctly projected).

This article also discusses NLY’s projected performance during the first quarter of 2016 when compared to the company’s fixed-rate agency mREIT peers.

My current buy, sell or hold recommendation and near-term dividend sustainability projection for NLY is stated in the “Conclusions Drawn” section of the article.

Author's Note: PART 1 of this article analyzed Annaly Capital Management Inc.'s (NYSE:NLY) recent results and compared several of the company's metrics to seventeen other mortgage real estate investment trust (mREIT) peers. PART 1 also showed how NLY's discount to book value ("BV") as of 12/31/2015 compared to the seventeen other mREIT peers. PART 1 helps lead to a better understanding of the topics and analysis that will be discussed in PART 2. The link to PART 1's analysis is provided below:

Annaly Capital's BV, Dividend, And Valuation Compared To 17 mREIT Peers (Post Q4 2015 Earnings) - Part 1

This two-part article is a very detailed analysis comparing NLY to many mREIT peers. I am writing this two-part article due to the continued requests that such an analysis be specifically performed on NLY. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of the each part of the article.

Focus of Article:

The focus of PART 2 of this article is to compare NLY's recent dividend per share rates, yield percentages and several dividend sustainability metrics to nineteen other mREIT peers. This analysis will show recent past data with supporting documentation within Table 4 below. This article will also discuss NLY's "near-term" dividend sustainability which is partially based on the metrics outlined in Table 4. A more "in-depth" analysis of NLY's near-term dividend sustainability will be provided in Table 5 below.

By analyzing each company's recent dividend per share rates, yield percentages, and several other dividend sustainability metrics, one will better understand which mREIT peers generally have a safer dividend rate going forward versus other peers who generally have a higher risk for a dividend decrease. This is not the only data that should be examined to initiate a position within a particular stock/sector or project future dividend per share rates. However, I believe this analysis would be a good "starting-point" to begin a discussion on the topic. At the end of this article, there will be a conclusion regarding the following comparisons between NLY and the nineteen other mREIT peers: 1) trailing 12-month yields based on a stock price as of 3/27/2015 and 4/1/2016 (for each respective time period); 2) annual forward yield based on a stock price as of 4/1/2016; and 3) annual forward yield based on BV as of 12/31/2015. I will also provide my current BUY, SELL, or HOLD recommendation on NLY.

Side Note: I believe there are several different "classifications" when it comes to mREIT companies. For purposes of this article, I am focusing on four. For readers who are new to my articles or for existing readers who need a "refresher" on several different mREIT classifications, please see PART 1 of this article (link provided above). In addition, as of 4/1/2016 all mREIT peers within this analysis with the exception of PennyMac Mortgage Investment Trust (NYSE:PMT) had stock prices that "reset" lower in reference to each company's monthly/quarterly dividend accrual. In other words, with the exception of PMT, each company's "ex dividend date" for the month/quarter has occurred. Readers should take this into consideration when the analysis is presented below.

Furthermore, technically speaking, several years ago Arlington Asset Investment Corp. (NYSE:AI) changed its "entity status" from a REIT to a C-Corp. per the Internal Revenue Code ("IRC"). However, AI still maintained many "mREIT-like characteristics" including the type of investments held by the company and the amount of annual dividend distributions paid to shareholders (which is the focus of PART 2). As such, I believe AI should still be compared to the mREIT companies within this analysis which are REIT entities per the IRC.

Dividend Per Share Rates and Yield Percentages Analysis - Overview

Let us start this analysis by first getting accustomed to the information provided in Table 4 below. This will be beneficial when comparing NLY to the nineteen other mREIT peers within this analysis regarding quarterly dividend per share rates and yield percentages.

Table 4 -Dividend Per Share Rates and Yield Percentages

(Source: Table created entirely by myself, obtaining historical stock prices from NASDAQ and each company's dividend per share rates from the SEC's EDGAR Database)

Using Table 4 above as a reference, the following information is presented in regards to NLY and the nineteen other mREIT peers (see each corresponding column): 1) dividend per share rate for the fourth quarter of 2015; 2) stock price as of 12/25/2015; 3) trailing 12-month dividend yield (dividend per share rate from the first quarter of 2015 through the fourth quarter of 2015); 4) annual forward dividend yield based on the dividend per share rate for the fourth quarter of 2015 using the stock price as of 12/25/2015; 5) annual forward dividend yield based on the dividend per share rate for the fourth quarter of 2015 using the BV as of 9/30/2015; 6) dividend per share rate for the first quarter of 2016; 7) stock price as of 4/1/2016; 8) trailing 12-month dividend yield (dividend per share rate from the second quarter of 2015 through the first quarter of 2016); 9) annual forward dividend yield based on the dividend per share rate for the first quarter of 2016 using the stock price as of 4/1/2016; and 10) annual forward dividend yield based on the dividend per share rate for the first quarter of 2016 using the BV as of 12/31/2015. Let us now begin the comparative analysis between NLY and the nineteen other mREIT peers.

NLY:

Using Table 4 above as a reference, NLY declared a dividend of $0.30 per share for the fourth quarter of 2015. This was the ninth consecutive quarter of a stable dividend per share rate. Due to the fact NLY aggressively reduced the company's dividend from $0.65 per share during the second quarter of 2011 to $0.30 per share by the fourth quarter of 2013, the company's yield percentages also materially decreased by the end of 2013 which have remained relatively stable during 2015 and the first quarter of 2016.

NLY's stock price traded at $9.75 per share on 12/25/2015. When calculated, this was a trailing 12-month dividend yield of 12.31%, an annual forward yield to NLY's stock price as of 12/25/2015 of 12.31%, and an annual forward yield to the company's BV as of 9/30/2015 of 10.01%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages continued to be slightly - modestly below average.

As was discussed in PART 1 of this article, NLY continued to have the lowest leverage ratios out of the agency mREIT peers within this analysis. From charting past trends, typically lower leverage ratios within the fixed-rate agency mREIT sector generally equate to below average yield percentages. Of course, there are various other factors at play regarding dividend sustainability. However, a company's leverage ratio appears to be a general tendency which I believe should be noted.

When combining this data with various other analytical metrics, I correctly projected in a prior American Capital Agency Corp. (NASDAQ:AGNC) dividend projection article NLY's dividend would remain stable at $0.30 per share for the first quarter of 2016. This projection was provided in the following article:

American Capital Agency's Dividend Projection For February 2016 - March 2016

This projection was based on numerous variables at play pertaining to NLY's operations. However, I currently believe two of the most important metrics to analyze are NLY's quarterly "estimated REIT taxable income" ("ERTI") and the company's "estimated core earnings" ("ECE"). To analyze these two metrics, Table 5 is provided below.

Table 5 -NLY Quarterly ERTI and ECE Analysis

(Source: Table created entirely by myself, partially using data obtained from NLY's quarterly shareholder presentation for the fourth quarter of 2015)

Using Table 5 above as a reference, NLY reported quarterly ERTI available to common shareholders of only $101.6 million for the third quarter of 2015 (see red reference "E"). In contrast to the prior quarter, this was the lowest quarterly ERTI figure NLY has reported over the past several years. When calculated, NLY had ERTI available to common shareholders of only $0.11 per share for the third quarter of 2015. This was materially below the company's dividend of $0.30 per common share. However, this figure also excluded the impact of NLY's net long "to-be-announced" ("TBA") MBS position that remained relatively unchanged (on a net basis) during the quarter. When including "net dollar roll" ("NDR") income of $98.0 million for the third quarter of 2015 (see red reference "G"), NLY reported ECE available to common shareholders of $199.6 million (see red reference "I"). When calculated, NLY had ECE available to common shareholders of $0.21 per share for the third quarter of 2015. This calculates to a dividend distributions payout ratio of 142% (see red reference "I / G"). I believe most would agree this was a material quarterly overpayment. Simply put, NLY's quarterly ECE was the lowest the company has recorded over the past several years.

However, when calculated, this ($0.09) per common share quarterly overpayment of ECE was mitigated by the $0.11 per common share underpayment of ECE during the second quarter of 2015. Still, the material overpayment during the third quarter of 2015 could have been seen as a "cause for concern" regarding NLY's dividend sustainability if this low per share amount persisted over several quarters.

With that being said, it should also be noted NLY provided an additional metric in regards to the company's dividend during the third quarter of 2015. This additional metric was "normalized core earnings" ("NCE"). When including the impacts from NLY's "catch-up" premium amortization expense, the company reported NCE available to common shareholders of $0.30 per share during the third quarter of 2015. This per common share amount matched to NLY's dividend distributions during the quarter. Even though NLY implied this metric factored into the company's dividend per share rate for the third quarter of 2015, I would caution readers that a company's premium amortization expense is, in fact, a "non-cash" item. Simply put, this is one of the temporary differences that arise between "Generally Accepted Accounting Principles" ("GAAP") and the IRC. Let us now take a look at what occurred during the fourth quarter of 2015.

NLY reported quarterly ERTI available to common shareholders of $216.3 million for the fourth quarter of 2015. This figure was a nice "bounce back" when compared to quarterly ERTI of only $101.6 million for the third quarter of 2015. When calculated, NLY had ERTI available to common shareholders of $0.23 per share for the fourth quarter of 2015. This was modestly below the company's dividend of $0.30 per common share for the fourth quarter of 2015. However, this figure also excluded the impact of NLY's net long TBA MBS position that remained relatively unchanged (on a net basis) during the quarter. When including NDR income of $94.9 million for the fourth quarter of 2015, NLY reported quarterly ECE available to common shareholders of $311.2 million. When calculated, NLY had ECE available to common shareholders of $0.33 per share for the fourth quarter of 2015. This calculates to a quarterly dividend distributions payout ratio of 90%. I believe most would agree this was a minor - modest quarterly underpayment. As such, this was a positive trend regarding NLY's future dividend sustainability. When calculated, this $0.03 per common share quarterly underpayment of ECE helped offset the ($0.09) per common share overpayment of ECE during the third quarter of 2015.

For 2015, NLY reported quarterly ERTI available to common shareholders of $791.4 million. When calculated, NLY had ERTI available to common shareholders of $0.84 per share for 2015. When including NDR income of $348.5 million for 2015, NLY reported quarterly ECE available to common shareholders of $1.158 billion. When calculated, NLY had ECE available to common shareholders of $1.22 per share for 2015.

This calculates to an annual dividend distributions payout ratio of 98%. I believe most would agree this was a minor underpayment of annual ECE, hence providing factual evidence as to why NLY continued to maintain a quarterly dividend rate of $0.30 per share throughout 2015. This was also one of the main reasons why I correctly projected a stable dividend of $0.30 per common share for the first quarter of 2016.

Once again using Table 4 as a reference, NLY's stock price traded at $10.33 per share on 4/1/2016. When calculated, this was a trailing 12-month dividend yield of 11.62%, an annual forward yield to NLY's stock price as of 4/1/2016 of 11.62%, and an annual forward yield to the company's BV as of 12/31/2015 of 10.23%. When comparing each yield percentage to NLY's agency mREIT peers, all three percentages continued to be slightly - modestly below average. I continue to believe NLY should have an annual forward yield slightly below the agency mREIT average.

When combining this data with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), I believe the likelihood of a dividend reduction for the second quarter of 2016 is a low to relatively low (20% - 30%) probability. If the Federal Open Market Committee ("FOMC") increases the Federal (Fed) Funds Rate (which impacts repurchase loan rates) in the spring of 2016 by 25 basis points ("bps") while mortgage interest rates/long-term U.S. Treasury yields remain suppressed, I believe the probability of a dividend reduction would be towards the higher end of this range (30% probability). If the FOMC decides to "hold-off" on increasing the Fed Funds Rate in the spring of 2016, I believe the probability of a dividend reduction would be towards the lower end of the range (20% probability). In addition, I believe the movement of MBS prices will directly impact NLY's use of the TBA forward market (which directly impacts NDR income). As explained in PART 1 of this article, NLY's hedging coverage ratio also needs to be considered when discussing this topic.

I also am projecting NLY outperformed most fixed-rate agency mREIT peers regarding BV fluctuations during the first quarter of 2016. This includes the favorable composition of the NLY's MBS portfolio and the company's projected low hedging coverage ratio during the first quarter of 2016.

Comparison of NLY's Trailing 12-Month Yields Based on a Stock Price as of 3/27/2015 and 4/1/2016, Annual Forward Yield Based on a Stock Price as of 4/1/2016, and Annual Forward Yield Based on BV as of 12/31/2015 to Nineteen Other mREIT Peers:

A growing number of readers have recently requested that I provide yield percentages and dividend per share rates for all twenty mREIT stocks I currently cover. As such, partially using Table 4 above as a reference, the following were the trailing 12-month yields based on a stock price as of 3/27/2015 and 4/1/2016 (for each respective time period), the annual forward yield based on a stock price as of 4/1/2016, and the annual forward yield based on BV as of 12/31/2015 of NLY and the nineteen other mREIT peers I currently cover:

A) Trailing 12-Month Yields as of 3/27/2015 and 4/1/2016, Respectively, (Based on Lowest to Highest Percentage as of 3/27/2015) (Good "General" Indicator of "Back-Testing" Dividend Sustainability; Exceptions Apply):

1) Two Harbors Investment Corp. (NYSE:TWO): 9.84%; 12.95% (12% Dividend Decrease Q1 2015 - Q1 2016)

2) MFA Financial Inc. (NYSE:MFA): 10.23%, 11.70% (Stable Dividend Q1 2015 - Q1 2016)

3) Hatteras Financial Corp. (NYSE:HTS): 11.06%, 12.90% (10% Dividend Decrease Q1 2015 - Q1 2016)

4) Anworth Mortgage Asset Corp. (NYSE:ANH): 11.26%; 12.93% (Stable Dividend Q1 2015 - Q1 2016)

4) Capstead Mortgage Corp. (NYSE:CMO): 11.26%; 11.07% (16% Dividend Decrease Q1 2015 - Q1 2016)

6) Apollo Residential Mortgage Inc. (NYSE:AMTG): 11.29%; 14.44% (Stable Dividend Q1 2015 - Q1 2016)

6) PMT: 11.29%; 14.80% (23% Dividend Decrease Q1 2015 - Q1 2016)

8) NLY: 11.40%, 11.62% (Stable Dividend Q1 2015 - Q1 2016)

9) Dynex Capital Inc. (NYSE:DX): 11.84%; 13.92% (13% Dividend Decrease Q1 2015 - Q1 2016)

10) AGNC: 12.14%; 12.91% (9% Dividend Decrease Q1 2015 - Q1 2016)

11) Invesco Mortgage Capital Inc. (NYSE:IVR): 12.31%, 13.49% (11% Dividend Decrease Q1 2015 - Q1 2016)

12) AG Mortgage Investment Trust Inc. (NYSE:MITT): 12.87%, 16.51% (21% Dividend Decrease Q1 2015 - Q1 2016)

12) American Capital Mortgage Investment Corp. (NASDAQ:MTGE): 12.87%, 11.61% (20% Dividend Decrease Q1 2015 - Q1 2016)

14) CYS Investments Inc. (NYSE:CYS): 13.71%; 12.96% (13% Dividend Decrease Q1 2015 - Q1 2016)

15) New York Mortgage Trust Inc. (NASDAQ:NYMT): 13.86%; 21.02% (11% Dividend Decrease Q1 2015 - Q1 2016)

16) AI: 14.49%, 21.72% (29% Dividend Decrease Q1 2015 - Q1 2016)

17) Orchid Island Capital Inc. (NYSE:ORC): 16.38%, 17.32% (22% Dividend Decrease Q1 2015 - Q1 2016)

18) ARMOUR Residential REIT Inc. (NYSE:ARR): 17.92%, 18.11% (3% Dividend Increase Q1 2015 - Q1 2016)

19) Western Asset Mortgage Capital Corp. (NYSE:WMC): 18.04%, 22.91% (33% Dividend Decrease Q1 2015 - Q1 2016)

20) Javelin Mortgage Investment Corp. (NYSE:JMI): 21.87%; 15.04% (25% Dividend Decrease Q1 2015 - Q1 2016)

When comparing each company's trailing 12-month dividend yields, a general conclusion that can be drawn is that the lower a company's percentage was as of 3/27/2015, the lower the probability of a dividend decrease (or even a stable/increasing dividend) during 2015 through the first quarter of 2016. In addition, generally the higher each company's trailing 12-month dividend yield was as of 3/27/2015, the higher the risk for future dividend decreases over the next several quarters. Again, there are some expectations to this general "trend" but I believe one can see some broad correlations in each company's trailing 12-month dividend yields. For instance, since MFA (rank 2), ANH (rank 4), AMTG (rank 6), and NLY (rank 8) had a relatively low trailing 12-month dividend yield as of 3/27/2015, I do not believe it was a surprise each company had stable dividends during 2015 through the first quarter of 2016. As one moves down this list, it is also not surprising companies like MITT (rank 12), MTGE (rank 13), AI (rank 16), ORC (rank 17), WMC (rank 19) and JMI (rank 20) had at or greater than a 20% decrease in dividends during 2015 through the first quarter of 2016.

Regarding ARR (rank 18), who was the only mREIT to have a net increase in dividends during 2015 through the first quarter of 2016, a notable portion of the company's 2015 dividends were classified as a "return of capital" ("ROC"). This includes distributions in excess of the underlying earnings and profit (E&P) of ARR and the company's taxable subsidiaries per the IRC. The following quote from ARR's earnings press release for the fourth quarter of 2015 supports the company's 2015 ROC classification:

"…Dividends in excess of taxable REIT income for the year (including any amounts carried forward from prior years) will generally be treated as non-taxable return of capital to common stockholders. Approximately 22.88% of common dividends for 2015 represent non-taxable return of capital…"

Simply put, if ARR followed most mREIT peer's "more cautious" stance on the amount of dividend distributions to shareholders during 2015, the company would have reduced its dividend per share rate by a notable percentage.

B) Annual Forward Yield Based on Stock Price as of 4/1/2016 (Based on Lowest to Highest Percentage) (Good "General" Indicator of Near-Term Future Dividend Sustainability; Exceptions Apply):

1) CMO: 10.56%

2) MTGE: 10.93%

3) NLY: 11.62%

4) MFA: 11.70%

5) TWO: 11.79%

6) HTS: 12.55%

7) DX: 12.57%

8) CYS: 12.71%

9) AGNC: 12.81%

10) ANH: 12.93%

11) IVR: 13.08%

12) PMT: 13.77%

13) AMTG: 14.44%

14) MITT: 14.59%

15) JMI: 15.04%

16) ORC: 16.17%

17) WMC: 18.16%

18) ARR: 18.30%

19) AI: 19.75%

20) NYMT: 20.38%

C) Annual Forward Yield Based on BV as of 12/31/2015 (Based on Lowest to Highest Percentage) (Good "General" Indicator of Near-Term Future Dividend Sustainability; Exceptions Apply):

1) MTGE: 8.14%

2) TWO: 9.10%

3) CMO: 9.11%

4) PMT: 9.27%

5) HTS: 9.29%

6) IVR: 9.33%

7) ANH: 9.60%

8) NLY: 10.23%

9) AGNC: 10.62%

10) MITT: 10.63%

11) MFA: 10.71%

12) DX: 10.89%

13) CYS: 11.11%

14) JMI: 11.40%

15) AMTG: 11.71%

16) AI: 11.88%

17) ARR: 14.14%

18) ORC: 14.43%

19) NYMT: 14.68%

20) WMC: 14.74%

Conclusions Drawn (PART 2):

PART 2 of this article compared NLY and nineteen other mREIT peers in regards to recent dividend per share rates, yield percentages, and several other dividend sustainability metrics. This article also discussed NLY's near-term dividend sustainability. Using Table 4 as support, below were the recent dividend per share rates and yield percentages for NLY:

NLY: $0.30 per share dividend for the first quarter of 2016; 11.62% trailing 12-month dividend yield; 11.62% annual forward yield to the company's stock price as of 4/1/2016; and 10.23% annual forward yield to the company's BV as of 12/31/2015

When combining the analysis above with various other analytical metrics not discussed within this specific article (some factors were covered in PART 1), the following projection regarding NLY's near-term dividend sustainability is provided:

NLY: Relatively high to high (70% - 80%) probability of a stable dividend for the second quarter of 2016

After NLY reports earnings for the first quarter of 2016 (in early May 2016), I will provide an exact per share rate and probability in regards to NLY's dividend for the second quarter of 2016.

My BUY, SELL, or HOLD Recommendation:

From the analysis provided above, including additional factors not discussed within this article (some factors were covered in PART 1), I currently rate NLY as a SELL when I believe the company's stock price is trading at less than a material (10%) discount to CURRENT BV (BV as of 4/1/2016), a HOLD when trading at or greater than a (10%) but less than a (20%) discount to CURRENT BV, and a BUY when trading at or greater than a (20%) discount to CURRENT BV.

Therefore, I currently rate NLY as a HOLD (however, close to my "SELL" range). This recommendation is unchanged when compared to my last NLY article (PART 1).

This recommendation considers the following mREIT factors: 1) projected future MBS price movements; 2) projected future derivative valuations; and 3) projected near-term dividend per share rates. This recommendation also considers the recent lowered probability of several Fed Funds Rate increases by the FOMC during 2016 due to recent macroeconomic trends/events.

Final Note: Each investor's BUY, SELL, or HOLD decision is based on one's risk tolerance, time horizon, and dividend income goals. My personal recommendation will not fit each reader's current investing strategy.

Disclosure: I am/we are long AGNC, MTGE.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I currently have no position in NLY, AI, AMTG, ANH, ARR, CMO, CYS, DX, HTS, IVR, JMI, MFA, MITT, NYMT, ORC, PMT, TWO, and WMC.