Annaly Capital Management: Scoop Up This 12.2%-Yielding Mortgage REIT At New 52-Week Lows

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About: Annaly Capital Management, Inc. (NLY)
by: Achilles Research
Summary

Annaly Capital Management is a promising high-yield income vehicle for investors with an above-average risk tolerance.

Thanks to the market sell-off last week, NLY is now oversold.

Shares are now reasonably cheap, sell for a discount to accounting book value.

Though the mortgage REIT has a narrow margin of dividend safety, I think the reward-to-risk combination is appealing.

An investment in NLY yields 12.2 percent.

Annaly Capital Management, Inc.'s (NLY) shares are a "Strong Buy" on the drop, in my opinion. Thanks to the market drop last week, Annaly Capital Management's shares again sell for a discount to accounting book value. Though NLY just narrowly covers its dividend payout with core earnings, I think the reward-to-risk ratio is attractive at today's valuation point. An investment in NLY yields 12.2 percent.

I think the market drop is a good opportunity to add a couple of shares of Annaly Capital Management to a high-yield, high-risk income portfolio. According to the Relative Strength Index, Annaly Capital Management's shares are now oversold (RSI of 27.18) and reached a new 52-week low last week @$9.81. With investor sentiment this negative in light of the market sell-off, Annaly Capital Management makes a compelling value proposition.

See for yourself.

Source: StockCharts

Annaly Capital Management - Overview

Annaly Capital Management is structured as a mortgage real estate investment trust, meaning the company is required by law to distribute the majority of its earnings to shareholders.

Annaly Capital Management has started off as a pure-play mortgage REIT - i.e. the company invested largely in agency mortgage-backed securities -, but it has increasingly ventured into other areas in recent years including commercial real estate and middle market lending.

Source: Annaly Capital Management Investor Presentation

Agency mortgage-backed securities still account for the lion share of Annaly Capital Management's investment portfolio, but the mortgage REIT has nonetheless broadened its investment platform in the last couple of years.

Here's a portfolio snapshot for each of the last five quarters.

Source: Annaly Capital Management

Earlier this year, Annaly Capital Management acquired another mortgage REIT, MTGE Investment Corp. in a deal valued at $900 million. Annaly Capital Management regularly acquired publicly-traded mortgage REITs in the last couple of years in order to scale its investment platform and increase portfolio diversification.

Source: Annaly Capital Management

Today, Annaly Capital Management is the largest mortgage REIT in the land, and has a more efficient cost structure than its peers (based on operating expenses as a percentage of average equity). Annaly Capital Management, thanks to its aggressive stance on acquisitions, is also more diversified than other mortgage REITs in the sector.

Source: Annaly Capital Management

Narrow Margin Of Dividend Safety

Annaly Capital Management has only a narrow margin of dividend safety, meaning the mortgage REIT distributes ALL of its core earnings, leaving little room for error.

In the last five quarters, Annaly Capital Management pulled in an average of $0.30/share in core earnings, and paid out an average of $0.30/share in dividends.

Here are Annaly Capital Management's dividend coverage stats over the last five quarters (average core earnings payout ratio: 99.7 percent).

Source: Achilles Research

Thanks to the market hiccup last week, Annaly Capital Management's effective dividend yield has crossed the 12 percent threshold.

Chart NLY data by YCharts

Valuation

Annaly Capital Management is not only oversold according to the Relative Strength Index, but shares have become more affordable for income investors, too. Today, income investors can scoop up Annaly Capital Management's shares for just ~8.2x Q2-2018 run-rate core earnings, and 95 cents on the dollar, implying a ~5 percent discount to accounting book value.

Risk Factors Investors Need To Consider

Annaly Capital Management has become a much larger, more diversified mortgage REIT in the last three years, which in my opinion lowers investment risks. That being said, though, Annaly Capital Management just about covers its dividend, which means the dividend could get cut if core earnings prove insufficient to cover the payout. Investors need to carefully monitor the mortgage REIT's dividend coverage going forward in order to react timely to a deterioration in fundamentals.

Your Takeaway

Annaly Capital Management is a "Strong Buy" on the drop, in my opinion. The mortgage REIT's shares are oversold, and once again can be gobbled up at a discount to accounting book value. Shares also dropped to a new 52-week low last week as investor sentiment turned negative in light of the market sell-off. Clear-headed income investors with a higher-than-average risk tolerance might want to consider NLY on the drop. The reward-to-risk ratio is attractive, and there is a reasonable chance of a rebound from oversold sentiment. Speculative Buy for income and capital appreciation.

If you like to read more of my articles, and like to be kept up to date with the companies I cover, I kindly ask you that you scroll to the top of this page and click 'follow'. I am largely investing in dividend paying stocks, but also venture out occasionally and cover special situations that offer appealing reward-to-risk ratios and have potential for significant capital appreciation. Above all, my immediate investment goal is to achieve financial independence.

Disclosure: I am/we are long NLY. 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.