3 Reasons to Sell Annaly Capital

Times are still tough for agency mortgage REITs such as Annaly Capital (NYSE: NLY  ) , but a healing economy, rising mortgage rates, and whispers regarding an eventual end to the Federal Reserve's quantitative easing program have spurred investors to send Annaly's stock higher over the past week or so.

Is it time to buy in? There are a few headwinds here, some that are part and parcel of investing primarily in agency paper, and at least one that is of Annaly's own making. Here are three issues that investors considering a stake in Annaly should take under advisement -- and might very well cause current investors to think about selling.

Management shakeup seems dicey
This spring, Annaly management will ask its shareholders to vote on a new management setup, which will change the current method of management by insiders to one that is carried out by an external company. As management points out, this is not uncommon in the mREIT universe. However, there are a couple of things that stockholders should be aware of that make this idea look less enticing for investors.

One confusing aspect is the makeup of the new management entity -- which will consist of Annaly's current management. This seems a bit strange, to say the least, and here's another thorny issue: Analysts note that, if the change goes through, management's pay will no longer be disclosed. In the current climate of increased calls for transparency and stockholder say-on-pay, this aspect looks very fishy.

Dwindling dividends and a shrinking spread
Annaly is well known for paying out excellent dividends, but that hasn't been the case for some time. Over the past two years, Annaly's dividend has been on a downward spiral, with the most current quarterly payout sitting at $0.45. Compared to other agency players, like American Capital Agency (NASDAQ: AGNC  ) , which has paid out its juicy $1.25 dividend for the past five quarters, and Capstead Mortgage (NYSE: CMO  ) which actually raised its payout by one penny for the first quarter of this year, Annaly looks like it is losing ground.

In addition, its spread -- the source of most of its income -- has shrunk to a measly 0.95%. Compare this to American Capital Agency's 1.63% and Capstead's 1.13%, and you can see why Annaly's dividend is looking somewhat anemic.

The exit of Fannie and Freddie could hurt Annaly
An especially problematic issue is that of the government's winding down of government-sponsored entities Fannie Mae and Freddie Mac. Of course, the exit of the two GSEs that currently back the lion's share of mortgage-backed securities might put all agency mREITs in peril. But Annaly, as the largest of all these players, would probably suffer the most, as investor concerns regarding the winding-down process impact the value of its current holdings -- and, very possibly -- make finding new investments with an acceptable risk level more difficult.

Should these issues cause investors to run from Annaly? Not necessarily. It is always better to be safe than sorry, though, and knowing all the facts before you make any important decision -- particularly one concerning investing -- should be priority No. 1.

Even with decreases, Annaly's dividend isn't the worst. But can investors count on that payout sticking around -- or, more importantly, increasing in time?  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!


Read/Post Comments (5) | Recommend This Article (5)

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  • Report this Comment On March 28, 2013, at 10:45 AM, jonkai3 wrote:

    it's as if you discovered NLY about a week ago?

    NLY's price hasn't been going up for a week, it has been going up since last quarter.. when mortgage rates bottomed and have since been going up for 4 months...

    and saying NLY's dividends are dwindling, after saying Mortgage rates are higher is a little more than just challenged????

    also in reality 45 cent dividend is an extremely good dividend when measured over the last 15 years of NLY dividends... it is just that the market and dividend were extra ordinary during the near 2nd great depression of a few years ago....

    which in itself is a feat to be sure, to have made huge profits during the housing and credit melt down and other companies going out of business, NLY made more money than ever.......

    Fannie an Freddie are not "winding down" they may change their name and their structure slightly... but they made a huge profit last year and this year and will continue to do so for the government... to say they are "winding down" is just ignorance.... removing them would cause not only a depression, but one that the US could never recover from, we would be third world within a few years... so something "like" fannie and freddie will always be there to guarantee home loans.. and besides, they make a huge profit.... it would be moronic to get rid of them, not that i would put something like that past the government, but when you are talking huge profits, suddenly other people step in.

    other than that... you have everything else... well just as wrong??? how long have you been following NLY? besides the last week?

  • Report this Comment On March 28, 2013, at 11:46 AM, JohnMaxfield37 wrote:

    <<saying NLY's dividends are dwindling, after saying Mortgage rates are higher is a little more than just challenged????>>

    Regardless of the direction of mortgage rates over the last couple months, NLY's quarterly dividends are declining. And while rates are heading higher, they're likely still well below the rates associated with most of NLY's holdings -- which where accumulated pre-QE3. As a result, given NLY's industry-leading CPR, it seems more than plausible to suggest that its dividend could continue to "dwindle."

    <<which in itself is a feat to be sure, to have made huge profits during the housing and credit melt down and other companies going out of business, NLY made more money than ever.....>>

    NLY's profits during and after the financial crisis weren't as much a "feat" as they were a fortuitous coincidence given what happened to interest rates and its portfolio of agency MBSes.

  • Report this Comment On March 29, 2013, at 12:29 AM, techy46 wrote:

    <<Regardless of the direction of mortgage rates over the last couple months, NLY's quarterly dividends are declining>>

    Ans so has NLY's stock price declined as the dividends declined. NLY's dividend stayed put this qaurter and that's why NLY's PS stayed put. Most NLY investors are not as ignorant as Apple's. If long term rates stay low and mortgages go up NLY wins. If the bond bubble burst's and it will there's going to be a whole lot of shaking.

  • Report this Comment On March 29, 2013, at 9:59 AM, jonkai3 wrote:

    <<<Regardless of the direction of mortgage rates over the last couple months, NLY's quarterly dividends are declining>>>>

    somebody hasn't seen NLY's recent dividend announcement then?

    why in the world do you think the Dividend suddenly stopped going down? "think mortgage rates" along with management's recent moves.

    anyone seeing what is happening thinking that the CPR rate is not also going down is more than slightly challenged... to show how little you understand what is going on... please let us all know what the CPR rate is when they annnounce it in a month... and compare it with the last year.... PLEASE....

    and then tell us what the CPR rate has been on average for 15 YEARS for gods sake... yet somehow with this exact CPR rate, NLY makes so much money that they invested their windfall in Duration to protect the portfolio to unheard of time frames just a few quarters ago... and this is during what you are callling "dwindling" dividends/earnings... someone needs to break out an SEC filing and see what really is going on.

    <<<<< fortuitous coincidence given what happened >>>>>

    yet not once did you mention that NLY would have incredible profits before hand, during or even afterward... where anyone and their mother who has been investing in these Mreits for any length of time could see what was going on... including the eventual decline of incredible... back to normal... which some bloggers who haven't been following MReits more than it appears a year, have now decided after the fact it is somehow the death of NLY now???? yet look at that... 45 cent dividend at the LOW POINT... that is astounding actually. that used to be the dividend everyone wished NLY would get back up to.... now it is their low.... that is how little time these bloggers have been following NLY.

  • Report this Comment On March 29, 2013, at 10:16 AM, jonkai3 wrote:

    --------------

    Compared to other agency players, like American Capital Agency (NASDAQ: AGNC ) , which has paid out its juicy $1.25 dividend for the past five quarters

    ----------------------

    what is important, (like NLY) it is wether that dividend is sustainable...

    if some bloggers would venture over to the SEC filings, they would notice that in reality, AGNC lost money in actual real money coming in over two of the quarters last year.

    they have been selling off their portfolio to make up the difference... check it out if you so venture over there...

    this would be all fine and dandy, until the mortgage rates started going up these last three months, and made their existing portfolio less valuable than new morts...

    so no more selling off the portfolio for gains to any great extent after this quarter... now they actually have to work in the actual business of MReits... and if one checks out how much they make in the actual spread business. you'll notice that it in no way covers the dividend... so big problems lay ahead for that dividend... (notice they did a secondary below book value in a desperate move) NO ONE in this business every does secondaries below book value... yet AGNC did one... (and as i predicted last quarter, AGNC will not be able to raise their book value by having secondaries with absurd premiums to book value.) ask the 34 million shareholders who got a secondary at $33.70 what they think of your "juicy dividend" or for that matter the fully 1/3 of all new shares issued over last year... and more this year... they are not doing as well as you think it appears... you should put some skin in this business so you know what it really means to have a "juicy dividend"....

    where NLY made so much, that they actually felt comfortable spending more money than ever on protecting the future profits by extending duration to DOUBLE what AGNC has...

    it is the difference between the grassHopper and the squirrel... winter is coming for those who made their living on selling rather than the spread... and those who didn't prepare for it are in for a shock. which i'll remind these bloggers here yet again they didn't understand what was happening in this field.

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