What happened
Shares of Annaly Capital Management (NLY -0.32%) were among the losers this week as rising mortgage rates threatened to squeeze the mortgage REIT, and one analyst expressed caution on the stock. The company also executed a reverse stock split at the beginning of the week.
According to data from S&P Global Market Intelligence, the stock finished the week down 25.5%, trending with the broader sell-off in the market after last week's fed funds rate hike. Since the rate hike, which came with hawkish commentary from Fed Chair Jerome Powell, investors seem to believe the risk of a recession has grown, as well as the likelihood of a sustained high-interest-rate environment.
So what
Rising mortgage rates tend to be bad for mortgage REITs like Annaly, which invests in mortgage-backed securities and other mortgage-related assets. Prices on mortgage bonds fall as yields rise, which means that Annaly's portfolio of assets loses money as interest rates and mortgage rates go up. Rising rates also cool off the real estate market, which is the main driver of Annaly's business.
This week, the 30-year fixed-rate mortgage jumped again, to 6.83% -- according to Bankrate, its highest level since 2007.
On Monday, Annaly enacted a 1-for-4 reverse stock split, which led to a 9% decline in the stock. Reverse stock splits are generally seen as an attempt to shore up a flagging share price. In this case, Annaly's stock was threatening to fall below penny stock range, usually considered to be under $5, and the 1-for-4 split lifted it back up above $20 momentarily. Management said it was doing the reverse split to make its share count more closely aligned to companies with a similar market cap, and it also believed the move would make the stock more attractive to a broader range of investors.
A dividend payment on Thursday also weighed on the stock, as share prices on high-yielding stocks tend to fall on the ex-dividend date. On Friday, Piper Sandler analyst Kevin Barker lowered his price target from $28 to $19 as he forecast another tough quarter for the mortgage finance sector, though he maintained a neutral rating on the stock.
Now what
With a dividend now yielding 20.4%, Annaly has attracted a horde of income investors, but the dividend is likely to buckle if mortgage rates keep rising. For example, in the second quarter, it reported a 9.6% economic loss, showing the business is losing value.
Management expressed confidence in the dividend in the most recent earnings call, but a deteriorating macro environment will continue to weigh on the stock.
