I’m Selling These 2 High-Yield Stocks

It's time to sell a pair of stocks from my Special Situations portfolio. Those stocks are the preferred Series D stock of Ramco-Gershenson Properties Trust (NYSE: RPT  ) and Annaly Capital (NYSE: NLY  ) .

Ramco-Gershenson Properties Trust
It's hard to believe it was just four months ago when the portfolio purchased the convertible preferreds of Ramco. The intent behind the purchase was to have a cash-generating security with some potential for upside and limited downside. And buying the convertibles with their higher yield offered that opportunity. They had a higher yield than the common while still offering upside via their convertible feature, allowing the holder to exchange the preferred for common stock.

In total, the purchase provided more than a 20% return in about four months. That's about $1.81 in dividends plus capital appreciation from $51.93 to $60.75 (as I write).

While the dividend still looks nice, at nearly 6% (compared to the common stock's 4.2% yield), I think the common stock -- the key driver of the convertible preferreds -- is reasonably valued now. In its latest annual guidance, the company predicted a midpoint of $1.07 per share in funds from operations (FFO), compared to $1.04 for 2012. That's modest growth for a stock trading at 15 times forward FFO.

But could there be more FFO growth on the way? The company announced a new deal recently to buy the remaining 70% in a joint venture of properties that it didn't already own. While the properties look to be higher quality and at a decent cap rate (7.4%), the financing and the constraints of Ramco's deleveraging mean that not much of the immediate value accrues to the common stock. For example, I estimate that revenue will go up 16%, while the number of common shares increases 14%. Admittedly, there's operating leverage in this type of business, but I'm not sure how much further FFO could grow.

Another source of increasing stock price would be dividend growth, but for now, I do not expect above-normal growth as the company continues working to deleverage. The recent payout increased just 3%.

So after a nice run, I'm saying goodbye to the Series D preferreds of Ramco-Gershenson.

Annaly Capital
In addition, my Special Situations portfolio is selling Annaly. I purchased two different lots back in 2011, at prices of $18.11 and $17.75, largely as a hedge against a declining or exploding economy and Congressional disability. Including dividends, those positions came out with a 7% gain and a 6% gain.

While the company continues to expand into new lines to help boost its interest rate spread, it's also adding new risk. Formerly, Annaly was exclusively focused on agency-backed securities, meaning it had no credit risk. Now, its future plans include assuming new risks in exchange for greater reward.

Annaly's dividend has declined markedly in recent quarters, and book value dropped quickly in the most recent quarter, down 4.5%. With book value now at $15.85 per share and the stock hovering just below that, at $15.62, I think it's time to sell.

So, my Special Situations portfolio will make these two sales as soon as practicable.

Interested in Ramco-Gershenson or Annaly or have another stock to share? Join me on my discussion board and follow me on Twitter (@TMFRoyal).

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Comments from our Foolish Readers

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  • Report this Comment On March 19, 2013, at 4:00 PM, spokanimal wrote:

    You are very clearly, and absolutely, NOT a contrarian investor.

    Before you hit your sell button, spend some time looking at the reason that annaly declined last fall... the re-assertion of QE via the transition from QE2 to QE3 and it's impact on annaly's fundamentals that triggered the selloff.

    Then, look at what is happening now with regard to QE3... the questions being asked about how the fed will unwind it's burgeoning balance sheet... and increasing dissention toward QE3 from members of the board of governors aside from the chairman. Take this "foward looking" view and contrast it with the book value and a dividend that "already" reflects much of the flattening of the yield curve from the past.

    Try to refrain from looking "over your shoulder", son, and focus on the probabilities of future actions affecting the yield curve...

    ... through contrarian-colored glasses...

    ... then ask yourself; what would Buffett, or Templeton, or Lynch do in a situation like this?

    Hope this helps.

    Spokanimal

  • Report this Comment On March 19, 2013, at 10:46 PM, techy46 wrote:

    I don't agree on NLY since I sold a lot of mine back in the 17's and added it back when it was in the 14's as the yield's gone done. I think NLY is now doing the right thing in expanding their leverage as the FED plays their last QE cards.

  • Report this Comment On March 20, 2013, at 7:54 AM, joekay123 wrote:

    i feel something sliping ;out side management, right

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