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

On Thursday, Annaly Capital Management, Inc. announced the it won't decrease its dividend for the first quarter of 2014. Does this mean that the worst is over for the high-yielding mortgage REIT?

Mar 23, 2014 at 7:00AM

G

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.

G

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.

G

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.

John Maxfield has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers