Annaly Capital Management: A View From The Perspective Of A Preferred Investor

| About: Annaly Capital (NLY)
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Summary

Annaly 's common shares have not performed well over the past five years.

However, Annaly's preferreds have performed remarkably well.

In my opinion NLY preferreds offer a nice yield at at relatively low risk.

Sorry I can't say the same for an investment in its commons.

For those of you unfamiliar with my preferred Investment philosophy, The Basics Underlying Investments Viewed Through the Eyes Of A Preferred Investor will explain how and why I became a preferred investor. More important, it will provide you the information necessary to fully appreciate and understand the process I utilize to research and determine whether or not I will invest in a particular company's preferred equities. What follows is that process.

When considering the acquisition of Annaly Capital Management (NYSE:NLY) preferred shares it's necessary that we view that company through a different set of eyes than we would were we interested in acquiring its common shares.

Consequently, unlike its common cousins, it's necessary that we first study the offering prospectus of the preferred shares we are interested in acquiring. To accomplish this, let's visit my favorite preferred search site, Quantum Online, which I set to open to Annaly. Below is a snapshot of a slice of that page:

A quick review informs us that Annaly is a REIT that owns a portfolio of real estate related investments. It IPO'd with a market value $9.9 billion.

Let's click on the Find Related Securities to examine any preferreds this company has to offer:

Here we learn that NLY offers four preferreds, (NLY-A, C, D, & E) that were initially offered respectively at 7.875%, 7.625%, 7.50%, and 7.625%.

Now let's click on NLY-A. I'm particularly partial to investigating the preferred offering the highest coupon rate. Because this page contains more information than can be covered in a snapshot view, I suggest you open the page and view it as I discuss the information that most interests me:

  • I like that this preferred is cumulative, meaning that in an event that payments are suspended, they accumulate and are owed to the shareholder, and will be repaid in full if and when the payments are restored. And they must be completely repaid before the common shareholder will be allowed to receive any further dividend payments. Additionally, there are probably more sanctions and restrictions placed on the company, and will remain so until the missed payments are repaid in full. As a rule, I only invest in cumulative preferreds.
  • These shares were callable at the company's option in 4/5/09 at $25.00 plus any accrued interest owed. This means that they are currently callable.
  • They pay a dividend of $1.96875 per share per year, or 0.4921875 per quarter, paid 3/31, 6/30, 9/30, & 12/31 of each year.
  • At the time of their IPO, 4/1/04, these shares were unrated by Moody's or S&P, which really doesn't concern me, but might concern a more conservative investor.
  • These shares have no stated maturity, meaning they can remain uncalled in perpetuity, which is fine with me. Pay me, pay my heirs, pay the heirs of my heirs for all I care. However, if called, it will be at their $25.00 call value plus any accrued interest owed.
  • Dividends are not eligible for the preferential income tax rate of 15% or 20%. You should be aware of how these tax ramifications will affect your investment bottom line.
  • As usual, upon liquidation, preferreds rank senior to commons and junior to debt, both secured and unsecured.

However, simply knowing and understanding the preferred issues of a company in no way allows one to gauge a company's long-term health or to fully comprehend its business model. To better accomplish this, a knowledgeable investor should be able to dig down into the numbers, and at least marginally understand a company's financial statements and conference calls.

Sounds reasonable, but extremely difficult for most investors, including myself. I often rely on interpretations by SA contributors who have proven more knowledgeable than myself. Unfortunately, the vast majority of their articles are written with the common shareholder's interests in mind, rather than those of the preferred shareholder - which, on occasion, might not be in alignment. Also, as I mentioned above, other SA members might view their conclusions in a different light. When this occurs, I simply try to figure out which argument sounds the most logical. Sorry, that's the best I have to offer.

Consequently, rather than attempting to digest and understand complicated financial statements, which I realize I won't be able to realistically accomplish with any degree of accuracy, I usually visit two websites to get an abbreviated, yet broad-based view of the particular company I'm considering making an investment in. They are Yahoo Finance and Finviz. I have cued each to open to the financials of NLY.

Above is a screenshot of NLY's 5-year chart, which, as far as I'm concerned, is the picture of a company that has not performed well. The price of its shares during this time have fallen from $16.37 on 12/12/11 to its current $10.43, an approximate 36% drop in value. Additionally, according to Dividend Investor.com, during that time it cut its common dividend several times; however, it has maintained it at $1.20 since 2014.

Above is a screenshot taken from a Finviz view of NLY's present financial highlights. Interestingly, the company's current market value is $10.68 billion, which is higher than its market value than when in IPO'd. It earned an income of $178.40 million on sales of $1.02 billion. Year to date, it's up a comfortable 21.04%. I also find its short-term debt/equity is a moderate 5.78, while its long-term debt/equity is considerably lower at 0.65.

According to the Yahoo chart above, NLY placed the very bottom of its peer group. The peers shown are: Vornado Realty (NYSE:VNO), AGNC Investments (NASDAQ:AGNC), Acre Realty (NYSE:AKR), Agree Realty (NYSE:ADC), and Alexandria Real Estate (NYSE:ARE).

Now let's see how its preferreds performed as viewed by MarketWatch charts:

What you have just witnessed are the reasons I love my preferreds. While the common share price over the past five years has declined by $5.94, an approximate 36% drop, NLY preferreds continued distributing their preferred dividends, which, I believe, it will continue to do so into the future. In my opinion, this is a large company that I expect to remain viable for a very long time.

Consequently, which preferred is the best buy at the current prices:

NLY Preferreds 12-8-16
Symbol Callable Yearly Dividend Price Dividend/Price Yield Best
NLY-A 4/5/09 1.96875 25.00 1.96875/25.00 7.87%
NLY-C 5/16/17 1.90625 24.04 1.90625/24.04 7.93% Best
NLY-D 9/13/17 1.875 24.04 1.875/24.04 7.80%
NLY-E 8/27/17 1.90625 24.03 1.90625/24.03 7.93%

The E for the moment is one penny better than C.

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

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.