Annaly's Ship Is Still Sailing Smoothly

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

This article is part of our Rising Star Portfolios series.

As the owner of a doctorate in literature, I can't help but be thrilled when a CEO uses one of the classics to explain a current business situation. That's exactly what Annaly Capital (NYSE: NLY  ) CEO Michael Farrell did on the company's quarterly conference call, relating the story of Helen of Troy and the Trojan War to the ongoing debacle in Greece and Europe generally. Despite the trans-Atlantic turmoil, Farrell still thinks the mortgage market offers Annaly good opportunities.

For the quarter, Annaly reported GAAP earnings of $120.8 million or $0.14 per share. Excluding unrealized gains or losses on interest rate swaps and interest-only mortgage securities, the company posted net income of $587.5 million, or $0.71 per share. That compares to $0.66 per share in the year-ago period.

That performance allowed the company to pay out a dividend of $0.65 per share in the second quarter -- the type of payout that has dividend investors flocking to mortgage REITs such as Annaly, Chimera (NYSE: CIM  ) , and American Capital Agency (Nasdaq: AGNC  ) . Each yields well into the teens.

Annaly sees further opportunity out there, and it raised about $2.4 billion last month through a secondary offering. It's not alone: Recent months have seen American Capital Agency and Invesco Mortgage Capital (NYSE: IVR  ) raise more capital. Billions are pouring into the space. Apollo Residential Mortgage (NYSE: MITT  ) debuted on the market earlier this year, among others.

That opportunity seems to be reflected in the widening interest rate spread between Annaly's cost of borrowing and what its investments earn. The company reported a 2.45% annualized spread, compared to 2.17% in the first quarter and 2.16% in the year-ago quarter. How does that compare to some of the other players?


Q2 Rate Spread

Q1 Rate Spread

Annaly 2.45% 2.17%
Chimera 4.20% 4.71%
American Capital Agency 2.46% 2.58%
Cypress Sharpridge (NYSE: CYS  ) 2.23% 1.83%
Armour Residential REIT (NYSE: ARR  ) 2.36% 2.40%

Source: Capital IQ, a division of Standard & Poor's.

Farrell's comments on the conference call also provide reason to be bullish on the company. He stated, "The uncertainty surrounding sovereign credit risk, regulatory reform and tepid economic performance is causing near-term volatility in asset prices and investor confidence, but the long-term implication of these conditions is that the very favorable operating environment in which we find ourselves is likely to persist for a significant period of time."

That looks like positive news for mortgage REITs generally.

As for the recent scare that a downgrade of government debt would force liquidation of its portfolio, Farrell was quick to point out: "Anyone who has concern about the selling off of assets under forced liquidations because of a downgrade is making a severe misjudgment."

Foolish bottom line
I purchased shares of Annaly to help hedge some of the risk in my Special Situations portfolio. With its hefty yield and favorable conditions for the company, it still looks like a solid place to park money. What do you think?

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios) here.

Jim Royal, Ph.D., owns shares of Annaly. The Motley Fool owns shares of Chimera and Annaly. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (0) | Recommend This Article (3)

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1533006, ~/Articles/ArticleHandler.aspx, 10/23/2016 4:44:08 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 day ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:04 PM
NLY $10.08 Down -0.05 -0.49%
Annaly Capital Man… CAPS Rating: ****
AGNC $19.48 Down +0.00 +0.00%
American Capital A… CAPS Rating: ***
ARR $22.46 Up +0.10 +0.45%
ARMOUR Residential… CAPS Rating: ***
CIM $15.40 Up +0.10 +0.65%
Chimera Investment CAPS Rating: ***
CYS $8.39 Down -0.03 -0.36%
CYS Investments CAPS Rating: ****
IVR $14.80 Up +0.04 +0.27%
Invesco Mortgage C… CAPS Rating: *****
MITT $15.22 Up +0.07 +0.46%
AG Mortgage Invest… CAPS Rating: ****