Is it real? That's all anyone wants to know about Annaly Capital's (NYSE:NLY) monster 14.7% dividend. After the company reported second-quarter earnings yesterday afternoon, the answer, for now, is a resounding "yes."
GAAP net income came in at $1.09 per share in the second quarter, up from $0.60 in the same period last year. Using a preferred metric the company calls "core earnings," net income was $0.66 per share, up from $0.60 in the same quarter last year.
Annaly declared dividends in the second quarter of $0.60 per share, which annualizes out to a 14.7% dividend yield. With the average dividend-paying stock in the S&P 500 yielding about 2.7%, that ain't bad. And when you consider other financial institutions like Citigroup (NYSE:C), Wells Fargo (NYSE:WFC), and Bank of America (NYSE:BAC) yield something close to zero, it's nothing short of fantastic.
How does it do it? At first glance, Annaly's scarcely different from the Wall Street nimrods that blew themselves up. It's a leveraged mortgage shop that buys bundled loans, leverages up to the moon, and prays for the best.
What sets Annaly apart is that it primarily holds so-called agency securities -- those issued by the likes of Fannie Mae (NYSE:FNM) and Freddie Mac (NYSE:FRE). These securities always enjoyed a relative blanket of safety thanks to an implied government backing, but really shot into the realm of "about as safe as it gets" territory after the government took Fan and Fred into conservatorship last summer, in essence guaranteeing its securities. Annaly's credit risk, therefore, is quite low.
What can affect its income, thanks in part to a good deal of leverage, are swaying interest rates. Variable interest rate products it holds can squeeze net income if management doesn't stay ahead of the ball. This is one of the only threats our 135,000-member CAPS community sees to Annaly's dividend. As CAPS member zwalt99 writes:
In many ways, this baby has been thrown out with the bathwater. That payout is much safer than your average REIT, as the Fannie and Freddie pools they invest in have been all but guaranteed by the government. My only (but big) concern is the interest rate situation. Their variable rate liabilities adjust at a much shorter duration than their variable rate assets, and interest rates won't stay this low forever. Once they start climbing, we'll find out just how good the management team is.
If it's too good to be true, it probably is. I can guarantee one thing: Annaly's 15% dividend will not last forever. Whether it vanishes thanks to an increasing share price, narrowing asset spreads, or a variable interest rate mishap that squashes net income is up for debate.
What do you think? Is this a looming dividend disaster, or an underfollowed gem? Feel free to share your thoughts in the comment section below.
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