Is the Worst Over at Annaly Capital Management, Inc.?

Shareholders of Annaly Capital Management (NYSE: NLY  ) caught site of a small glimmer of hope on Thursday when the company announced it will pay a $0.30 per share dividend for the first quarter of 2014. This maintains the distribution from the fourth quarter of last year.

Although this might not sound like big news, rest assured it is. As you can see in the chart below, Annaly's quarterly payout has declined consistently since the beginning of 2010. As a result, the mere fact it didn't descend further is perhaps reason enough for investors to breathe a sigh of relief.

There's simply no question the last few years have been challenging for Annaly and its mREIT brethren. When short-term interest rates first dropped to near-zero in the beginning of 2009, these companies made a killing, as their business model consists of arbitraging short- and long-term rates.

Everything changed, however, when the Federal Reserve started driving long-term rates down as well through three rounds of quantitative easing. This squeezed the interest rate spread that mortgage REITs rely on to fund their generous payouts.

Paradoxically, things got even worse after the central bank hinted last year that it would reduce its support for the economy via purchases of long-term Treasuries and agency mortgage-backed securities. It's since initiated the "taper," which has driven long-term rates up and thus the price of long-term bonds down.

You can see the impact of this on Annaly's book value per share in the chart below.

In light of these trends, what does the future hold for Annaly? Although there's no question, holding all else equal, higher long-term interest rates are in Annaly's favor -- and particularly if, as Fed chairwoman Janet Yellen intimated on Wednesday, short-term rates remain depressed -- the transition period is painful.

More specifically, a rising interest rate environment (with respect to the long-end of the yield curve), as opposed to a statically high one, simply isn't hospitable to mortgage REITs. As long-term rates increase, the value of mortgage-backed securities decreases. And because these are used as collateral for financing, the logical conclusion is the cost of funds will increase as well -- which, not coincidentally, is exactly what we've seen from Annaly over the last three years.

The net result is the good times are over, at least temporarily, for companies in the agency mortgage REIT space. And thus, the reason that many of their stocks, Annaly's included, are trading for considerable discounts to book value.

Should the latter be enough to lure you into the sector? I can't answer that question. But whatever you or I may think of Annaly and its brethren, everything has a price.

If you're looking for great dividend stocks, start with this valuable list
Top analysts at The Motley Fool recently put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

Read/Post Comments (0) | Recommend This Article (3)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2885075, ~/Articles/ArticleHandler.aspx, 9/1/2015 10:40:03 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

John Maxfield

John is The Motley Fool's senior banking specialist. If you're interested in banking and/or finance, you should follow him on Twitter.

Today's Market

updated Moments ago Sponsored by:
DOW 16,162.14 -365.89 -2.21%
S&P 500 1,936.21 -35.97 -1.82%
NASD 4,684.87 -91.64 -1.92%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/1/2015 10:24 AM
NLY $10.03 Down -0.03 -0.30%
Annaly Capital Man… CAPS Rating: ****