3 Reasons to Buy Annaly Capital

Despite the Federal Reserve’s QE3 program, mortgage REITs -- particularly those that invest primarily in agency-only paper backed by Fannie and Freddie -- have not imploded, though yields and dividends have suffered a bit.

But savvy investors know that the long-term view is most important, and that quantitative easing won’t be around forever. For mREITs, Annaly Capital (NYSE: NLY  ) is the granddaddy of them all, and its longevity presents many good reasons to consider it a buy -- three of which I see as the most compelling.

1. Returns over the long term have been spectacular
Since its 1997 IPO, Annaly has been very good to its investors. The company notes that its total return  to stockholders is somewhere between 500% and 600%, compared with an approximate return from the S&P 500 of 85% during the same timeframe. Annaly has also shared dividends totaling $9 billion since then.

But, you wonder, what about now? While it’s true that Annaly has been trimming its dividend over the past year, the most recent payout stayed stable from the previous quarter. Other mREITs, such as Armour Residential (NYSE: ARR  ) and CYS Investments (NYSE: CYS  ) , have been forced to decrease dividends lately. Armour cut its payout by 12.5%, and CYS enforced a 25% trim on its dividend.

2. High prepayments may give Annaly an edge
There’s no doubt that Annaly’s constant prepayment rate is high: 19% as of the fourth quarter, compared to CYS’s 17.6%, and Armour’s lower-still 14.1%. However, this could be a blessing in disguise for Annaly, which could find itself with more cash on hand for newer securities, which will likely have a better spread if mortgage rates continue to rise. Extra cash will also come in handy for Annaly’s newest project, the purchase of CreXus Investments (UNKNOWN: CXS.DL.DL  ) .

3. Annaly proves its flexibility
One of the most conservative mREITs in the business, Annaly has always trod the straight and narrow, never deviating from its agency-only mantra, even in lean times. Since the financial crisis, however, the unprecedented involvement of the Fed has prompted Annaly to branch out into uncharted waters through its purchase of CreXus Investment.

As CreXus is a buyer of commercial mortgage-backed securities, this new direction has made some analysts uneasy. While Annaly’s change of heart is not without risk, I think it shows that the company is willing to take a chance when it is truly necessary, and in small increments -- thereby keeping the risk as low as possible. And that, after all, is what good management is all about.

There’s no question Annaly Capital’s double-digit dividend is eye-catching, even at its current, less robust rate. But can investors count on that payout sticking around? With the Federal Reserve keeping interest rates at historically low levels, Annaly has had to scramble to defend its bottom line. In The Motley Fool’s premium research report on Annaly, senior analysts Ilan Moscovitz and Matt Koppenheffer uncover the key challenges the company faces and divulge three reasons investors may consider buying it. Simply click here now to claim your copy today!


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