2011: The Year Annaly Capital Kept Gushing Cash

As 2011 draws to a close, it's worth it to take a peek at our investments to see what's working and what's not.

That's what we aim to do today, as we pull out the instant replay and consider the year that was at Annaly Capital (NYSE: NLY  ) .

A few Foolish facts about Annaly

Year-to-Date Stock Return 0.1%
P/E 12.2
Dividend Yield 14.4%
1-Year Earnings-Per-Share growth 2.3%
1-Year Book Value Per Share Growth 7%
CAPS Rating (out of 5) ****

Data from Morningstar, S&P Capital IQ, and Motley Fool CAPS.

What happened at Annaly this year?
Annaly's stock didn't have a three-peat banner year after the big gains of 2009 and 2010. But investors don't buy mortgage REITs for stock appreciation -- they're after yields. And Annaly has delivered on that front once again. Though quarterly payouts fell from $0.64 to $0.60 since last December, the 14% yield is still enormous.

Residential mortgage REITs like Annaly have hit a bonanza over the past few years. As the Federal Reserve lowered overnight interest rates to nearly 0% to support the struggling economy, Annaly's cost of borrowing plunged from 4.8% in mid-2006 to 1.6% where it stands today. This has pushed its interest-rate spread -- the difference between the interest rate it collects and the rate it borrows -- up about sixfold to 2.08% last quarter. The interest rate tailwind was the key reason I purchased shares of the stock for the real-money publicly facing Dada Portfolio that I co-manage.

Annaly yields a bit less than many of its peers, but that's largely because it's among the most conservative of residential REITs. It tends to stick more closely to government-guaranteed securities than the higher-yielding Invesco (NYSE: IVR  ) and Chimera (NYSE: CIM  ) , whose portfolios earns higher interest rates. Yet even compared with its more conservative portfolio peers such as American Capital Agency (Nasdaq: AGNC  ) or even the tiny Armour Residential (NYSE: ARR  ) , Annaly employs far less leverage.

In 2011, interest-rate spreads declined slightly, while leverage declined a bit from 8.4 times to 7.1. Of note were the large share issuances -- $5.8 billion in 2011 -- that should help the company invest even more capital (and boost management's compensation), though I'm not terribly concerned since the selling prices were above book value.

Steady as she goes
For 2011, Annaly Capital held steady, again collecting a fat interest spread and paying big dividends. The Fed reiterated that it's going to hold rates low for some time as the economy slowly recovers, though there was a bit of concern that spreads could get pinched should the Fed take more aggressive action.

I think Annaly has what it takes to succeed in the new year, but our analysts have selected a different stock that they believe is poised for tremendous growth in 2012. Find out which company in our new free report: "The Motley Fool's Top Stock for 2012." Thousands have already requested access and it'll be available for only a limited time. So get access while you can -- it's free.

Ilan Moscovitz doesn't own shares of any company mentioned. The Motley Fool owns shares of Chimera Investment and Annaly Capital Management. Motley Fool newsletter services have recommended buying shares of Annaly Capital Management. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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