Annaly Capital Management (NYSE: NLY) engages in the investment and financing of residential and commercial assets.
It operates through the following investment groups: Agency, Residential Credit, Commercial Credit, and Middle Market Lending.
The Agency group invests in agency mortgage-backed securities. The Residential Credit group involves non-agency residential mortgage assets within securitized products and whole loan markets. The Commercial Real Estate Group includes commercial mortgage, loans, securities, and other commercial real estate debt, and equity investments. The Middle Market Lending group provides financing to private equity-backed middle-market businesses across the capital structures.
The company was founded in 1996 and is headquartered in New York.
Shares of Annaly Capital Management are almost unchanged in the past year having minor gains of about 4.5%. I am neutral on NLY stock. The very high forward dividend yield of about 11% may be in danger in 2022 as interest rate hikes are expected by the Federal Reserve.
Annaly Capital Management: Bullish Side
For mortgage REITs like Annaly Capital Management, the total return consists of the stock price appreciation and the high dividend yield. It is notable that on its official website the firm states that “Annaly has a demonstrated track record of outperformance, beating the S&P 500 in terms of total return by more than 1.5x since the firm’s initial public offering in 1997.”
The Annaly Capital Management dividend of $0.22 per quarter translates now at a forward dividend and yield of $0.88 and 10.9%, respectively, based on the latest stock price of $8.03.
Investors looking for Top Dividend Stocks most probably will classify NLY stock as a top choice for income generation. However, a dividend by itself should not be the only reason to invest in a stock, without checking other key financial metrics.
Why invest in Annaly? Referring again to the official website of the company a few reasons mentioned are size and scale of assets, a diversified platform, long-term financial performance, significant deal experience, and a strong ESG focus.
NLY stock has a Piotroski F-Score of 7, indicating a very healthy situation, and it is now trading close to a one-year low.
The latest GAAP EPS of $0.34 were a beat of $0.10, and profitability on a TTM basis has improved a lot. NLY stock has a return on assets of 3.72%, which is better than the industry average of 2.25%.
The return on equity of 20.82% is also higher than the industry average return on equity of 10.16%.
Compared to an average industry P/E ratio of 9.07, the P/E ratio of NLY stock is 4.1.
Annaly Capital Management: Bearish Side
One of the most negative factors for Annaly is very negative growth in revenue. Analyzing the last five years, revenue has been decreasing by -20.51% yearly. The annual dividend is also volatile in the past years, declining from $1.20 in FY 2018 to $0.91 in FY 2020.
Shareholders have been diluted in the past year, with total shares outstanding growing by 3.7%, and some key metrics in the Q3 2021 financial results raise concerns.
Mortgage REIT stocks witness increased volatility in periods of rising interest rates, while their profitability can be harmed significantly. Net interest margin has declined from 2.15% on September 30, 2020, to 2.01% on September 30, 2021, while the net interest spread has declined year-over-year from 2.10% to 1.97%.
Higher interest rates anticipated could lower the net interest margin, which should be bad news for NLY stock and its profitability.
Wall Street’s Take
Annaly Capital Management has a Moderate Buy consensus based on three Buys and four Holds. The average Annaly Capital Management price target of $8.92 implies 11.2% upside potential.
Bottom Line
Annaly Capital Management has a very high dividend yield that is appealing to investors for income generation.
The fundamentals are strong, but recovery in the first nine months of 2021 is yet risky.
Higher interest rates will be a key challenge for dividend sustainability, but still, the stock is a defensive pick in a rocky start for the U.S. stock market in 2022.
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