Is It Finally Time To Consider Annaly Capital Management Again?

This mortgage REIT might just have turned the corner.

Jun 27, 2014 at 6:00AM
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Source: Company

For yield-hungry investors looking for some recurring cash, Annaly Capital Management (NYSE:NLY) is an interesting choice among mortgage REITs. The mortgage REIT sector hasn't done well for shareholders in 2013, and neither has Annaly Capital. But the company benefits from return of investor interest and, most importantly, grew its book value the first time since 2012.

U.S. financial crisis led to a boom in mortgage REITs
The collapse of the residential mortgage-backed securities market and the establishment of practically zero interest rates have caused an explosion of mortgage investment structures, also known as mortgage REITs.

Mortgage REITs largely follow a straightforward business model: They take advantage of ultra-low interest rates by leveraging up their balance sheet and invest short-term funds into long-term mortgage securities.

While the business model obviously retains some risks due to leverage and maturity mismatches between assets and liabilities, Annaly Capital is an interesting investment opportunity in the mortgage REIT sector nonetheless.

Solid track record in a variety of economic environments
One thing to mention when it comes to Annaly Capital is its distinguishing, long track record. Most mortgage REITs look back at short operating histories with many structures being brought to market only over the last five years. Not so with Annaly Capital: The mortgage REIT commenced operations in 1997 and has proven itself during a variety of crises, mostly notably the dotcom crisis in 2000/2001 and, most recently, the financial crisis which both subsequently caused interest rates to fall into nirvana.

Since 1997, Annaly Capital has paid regular quarterly dividends, even though distributions have been oscillating due to Annaly Capital's changing levels of profitability. Volatile (risky) dividends are ultimately the price investors pay for Annaly Capital's high initial dividend yield.

Return to book value growth
Probably the most encouraging sign, that Annaly Capital has turned the corner, was its return to positive book value growth in the first quarter of 2014.

Annaly Capital reported a significant decline in its book value per share in 2013 (see chart below). The mortgage REIT reported a book value of $16.60 per share in Q3 2012 which has fallen ever since to a low of $12.13 in Q4 2013. In the first quarter of 2014, Annaly Capital reported a much-awaited return to positive book value growth as it reported a book value of $12.30.

This has been a major, positive sign for investors that the bleeding, at least for the time being, has stopped.

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Investors more optimistic about Annaly Capital
Investors have been stepping up their game lately and returned to high-yield income investments such as Annaly Capital since the beginning of the year. Deep uncertainty about further book value losses caused Annaly Capital to trade at a significant discount to book value at the end of 2013. Its discount to book value, at that time, stood at approximately 20%, the highest level in years.

This trend, however, has largely been reversed with Annaly Capital now achieving significantly higher P/B multiples than at the beginning of the year.

Annaly Capital now trades at a 5% discount to its reported first quarter book value of $12.30.

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Dividends
Annaly Capital is a high-yield income play with attractive dividend prospects. The company presently pays investors $0.30 per share quarterly and, when it pays the next dividend at the end of July, will have held its dividend payout steady for three consecutive quarters. With a dividend yield of approximately 10.3%, Annaly Capital is a solid income vehicle for risk-seeking investors.

The Foolish Bottom Line
Annaly Capital has a track record in delivering dividends for shareholders under varying economic environments. The price appreciation in Annaly Capital's stock and higher observed book value multiples are a sign of strongly rebounding investor confidence which fell off a cliff in 2013 in light of ongoing book value declines.

Since both Annaly Capital's book value and dividend payments appear to have bottomed out, Annaly Capital is an interesting high-yield income play with a convincing long-term dividend record for investors seeking exposure to the mortgage REIT sector.

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Kingkarn Amjaroen 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.

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