Stock investors today face data overload.
Aside from basic financial statements, there is a flood of ratios, statistics, multiples, analyst estimates, comps, margins, and industry-specific metrics to wade through.
In this new series, I will choose a company and distill all the data down to three numbers you absolutely need to know before making a buy-sell-ignore decision.
The number that jumps off the page for Annaly Capital is its 15% dividend yield. As a REIT, Annaly must pay out at least 90% of its taxable income as dividends. In return, it gets favorable tax treatment. If you're following along, that huge dividend yield means Annaly's profits have been huge recently.
Let's see why with the next number.
Annaly's net interest rate spread in the first quarter of 2010 was 2.22%. To understand what this means, let's back up to how Annaly makes money.
Annaly is basically a proprietary trading desk that specializes in buying and selling mortgage-backed securities. Yes, proprietary trading desks are one of the things that the Wall Street banks have been criticized for. And mortgage-backed securities haven't had a good run over the last few years. But Annaly is quite different from Goldman Sachs (NYSE: GS ) , Citigroup (NYSE: C ) , and their peers. While they've stumbled, Annaly has thrived.
Unlike the banks, Annaly doesn't take deposits, it doesn't borrow from the Fed, and it isn't too big to fail. However, it has found a way to get some indirect government help. The vast majority of the securities it owns is guaranteed by government-backed entities like Fannie Mae (OTC BB: FNMA.OB) and Freddie Mac (OTC BB: FMCC.OB), so it has avoided the default risk that destroyed the portfolios of the Wall Street banks.
The 2.22% represents the difference between the interest Annaly's earning on these securities and the interest it pays on its borrowings. This 2.22% is pretty huge historically. Annaly knows that these amazing spreads likely won't last, so it has partially hedged its portfolio with interest rate swaps totaling $22.8 billion of notional value (vs. total assets of $72.7 billion).
The final number gives us some more insight into risk.
Here's where Annaly is dangerously similar to the Wall Streeters.
Its $72.7 billion in assets is primarily financed by $53.8 billion in short-term repurchase agreements. These are the same types of borrowings that drove Bear Stearns into the arms of JPMorgan Chase (NYSE: JPM ) , helped bankrupt Lehman Brothers, and forced Bank of America's (NYSE: BAC ) Merrill Lynch rescue.
One saving grace is Annaly's low leverage ratio. Whereas the Wall Street firms hit asset-to-equity ratios upwards of 30:1 before their crisis, Annaly's is well under 10.
As you decide whether to buy, sell, or ignore Annaly Capital, keep these three numbers top of mind. They will help you determine whether Annaly's tantalizing dividend yield is a siren song or a tremendous opportunity.