Published:
February 11, 2008
Formed in 1997, Annaly Capital
Management (NYSE: NLY, $20.64)
owns a $39 billion portfolio of
residential mortgage-backed securities and has over a decade of
experience in weathering different interest rate environments. All of these securities are
issued by an agency of the United States government, such as Ginnie
Mae, Fannie Mae (NYSE: FNM), or Freddie Mac (NYSE: FRE). As such,
they carry an actual or implied "AAA" rating, which means
virtually no risk of default. The firm
makes its money from the spread between the interest income on
mortgage-backed securities and the costs of borrowing to finance
their purchase.
Annaly also owns FIDAC, an asset management firm that manages a $14
billion fixed-income portfolio. FIDAC receives advisory fees based
on a percentage of assets. This fee-based income provides Annaly
with stable revenues that don't rely on interest rate spreads.
Dividend: Management has recently announced its
eighth consecutive quarterly dividend increase. The latest
quarterly dividend of $0.34 a share represents a dramatic +31%
increase from the prior quarter and gives the stock a projected
annual payout of $1.36 per share. That equates to a yield of
6.6%.
As a real estate investment trust, Annaly must pay out at least 90%
of earnings to shareholders to avoid paying corporate taxes.
Over the past 12 months, NLY has distributed $1.04 per share on
earnings of $1.16 per share, in line with this requirement. With the
firm projected to earn $2.63 per share in 2008, it would have to pay
out a total of $2.37 per share to reach the 90% threshold.
As a real estate investment trust, Annaly's distributions are taxed
at the full income tax rate of up to 35%, depending on your tax
bracket. As such, the shares are best held in a tax-deferred
account. Dividends may be reinvested through Annaly's dividend
reinvestment plan. You can get more information on the plan by
phoning Mellon Investor Services at 1-800-301-5234.
Performance Drivers: After repositioning its
portfolio in high-quality securities over the past two years, Annaly
has seen several straight quarters of
solid
earnings growth. The latest third-quarter results reflect the
benefit of recent share issues. The company made good use of the
fresh equity capital, moving into higher-yielding assets that
increased the average yield on its portfolio holdings to 5.84%, up from
5.44% a year ago. As a result, the interest rate spread more than
doubled from the year-ago quarter to 0.67%.
Outlook/Valuation: The company is
well-positioned to benefit from a more favorable interest rate
environment. As short-term interest rates trend down, the
company's borrowing costs will also fall and profit margins
should continue rising. For the full year, 2007 earnings are
expected to have almost tripled to $1.27 per share. 2008
earnings are forecasted to more than double to $2.63 per
share. Trading at just seven
times 2009 earnings, the shares still represent a good value despite
returning about +61% over the past year -- and +13.5% since the start
of 2008.
Action
To Take ---> The near-term outlook is
favorable for this mortgage REIT, but investors should be prepared
to monitor the environment for any changes to this prognosis. For more
conservative investors, Annaly's preferred shares (NYSE: NLY-PA) may be the ticket.
Good investing!
Carla Pasternak
Editor
High-Yield
Investing
About High-Yield Investing
High-Yield Investing is
a monthly investment newsletter that brings you a wealth of information on the
market's leading income stocks and funds, as well as a host of relatively
unknown investment options that you probably won't find coverage of anywhere
else. Many
of these securities provide investors with annual dividend yields of 10%, 15%,
even 20% or more. The newsletter not only provides subscribers with
investing ideas that produce incredibly high dividend yields, but the kicker is
that these high-yield investments have also consistently outperformed the major
market averages. (Learn
More)
About Carla Pasternak
Editor of StreetAuthority.com's High-Yield Investing newsletter since its
inception in May 2004, Carla Pasternak draws on a variety of financial
backgrounds to make profitable calls on income-generating stocks for her
readers.
Carla has been employed in the investment industry for more than two decades.
In addition to her work as a writer for several nationally recognized financial
publishers, her previous experience includes a position as president of a
well-respected investor relations firm. She has also been writing shareholder
reports for public companies since 1980.
A highly successful investment analyst, Carla specializes in high-yield,
income-paying stocks. In that pursuit, she's always mindful to select companies
that not only pay rich dividends, but that also deliver strong long-term capital
gains. Furthermore, Carla's experience in writing SEC filings gives her the
added insight required for her to truly understand a company's current and
future financial health.
On the educational front, Carla holds BA, MA, MBA and Ph.D. degrees. When
she's not watching the market, she's teaching business courses at the college
level and managing millions of dollars in portfolio assets.
To learn more about Carla Pasternak's premium income investing newsletter -- High-Yield
Investing -- please visit
this link.
|
