The financial crisis was a godsend to Annaly Capital Management (NYSE: NLY), a high-yielding pioneer in the mortgage REIT space. But the last few quarters suggest that the chickens may be coming home to roost, as both its dividend and book value per share have declined since peaking in the middle of 2011. Should investors interpret this as a time to buy or sell the popular dividend stock?
Let me start out by saying that it's no coincidence Annaly's stock yields 12% -- or nearly six times the average on the S&P 500 (INDEX: ^GSPC). The company sits on a massive portfolio of agency mortgage-backed securities that deteriorate in value as long-term interest rates rise. And on top of this, there are legitimate reasons to question the credibility of the company's management team.
It's for these reasons, among others, Annaly wasn't included in our popular free report about nine rock-solid dividend stocks.
At the same time, few investors get rich by buying market darlings. As Warren Buffett is famous for saying, successful investors are fearful when others are greedy and greedy when others are fearful. This is why you'd be excused for wondering whether it's time to consider a position in Annaly -- as much as I genuinely hate to admit that.
There are two reasons for this. In the first case, as you can see in the chart below, Annaly is trading at the biggest discount to book value in over a decade. At present, shares in the mortgage REIT sell for 0.91 times book value, giving investors a 9% cushion to absorb further deterioration in its asset portfolio.
And in the second case, even I can't help but acknowledge that Annaly's leaders have steered the ship better than many of its competitors.
American Capital Agency (NASDAQ: AGNC), the second largest mortgage REIT by assets, provides a case in point. While Annaly has been adroitly trimming its MBS positions over the last year, American Capital Agency has gone in the other direction, increasing leverage despite the downward trend in MBS prices -- remember, these are inversely correlated to long-term interest rates.
You can see the impact of this on the companies' book values per share. While Annaly's has fallen by a nevertheless disturbing 17.8% since the end of last year, American Capital Agency's has outpaced it with a decline of 19.4% over the same time period.
Do these factors mean that Annaly is necessarily a buy? Not by any stretch of the imagination. Any stock that yields 12% should immediately raise red flags given what yield suggests about risk. But I would say that, if there were a time to buy, doing so now seems preferable to paying the generous multiple it was bringing before the sky started to fall.
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