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Annaly Capital Management, first look

December 24th, 2011 · 2 Comments

Well, here is an idea from a forum member, let’s look into this one. For starters, a 14% dividend yield.. It seems our forum member might be onto something

How about this for a quarterly dividend pay-out:

What do they do?

  • Well, they’re registered (or at least taxed) as a REIT, a real estate investment trust, which has some advantages: As a REIT, the company would not be subject to federal corporate income tax, provided it distributes at least 90% of its taxable income to its stockholders.
  • The company invests primarily in mortgage pass-through certificates, collateralized mortgage obligations, agency callable debentures, and other mortgage-backed securities representing interests in or obligations backed by pools of mortgage loans. Annaly Capital also invests in Federal Home Loan Bank, Federal Home Loan Mortgage Corporation, and Federal National Mortgage Association debentures

Hmm. Difficult to kick the tires of this, for the non-specialist, especially one who just wrote about information asymmetries in financial markets.
They seem to finance themselves with short-term notes, putting these to work in these financial instruments

How are they doing?
Well, if you’re able to pay a whopping dividend, they’re probably doing something right. Or alternatively, the yield is so high because some feel they might not be. The three year chart suggests the former is more likely than the latter though:

The top officials earning $23.6M, that’s pretty hefty, on first sight, but we don’t know how much of that is option based. A good year can do wonders here.

The earnings are good but flat ($2.33 last year, $2.41 this year, $2.29 next, expected). It seems pretty seasonal, although the variety comes from operating expenses (being curiously negative in Q4 2010).

No insider sales, mostly option exercise. A curious buy at $26.29.

The share count is raising rather steeply, from 662M in Q4 2010 to 948M at the end of Q3 2011.

We’re not going to pretend that we understand the mortgage backed securities stuff they’re investing in, so there is little we can add to this first attempt at ‘analysis.’ Perhaps others want to have a go here, this is just a first look.

However, technically it is somewhat interesting.

  • We’re just broken out of the 200 day moving average, but that doesn’t seem important in the past
  • It’s very nearly oversold and at the top of the recent trading range. That suggests they might be in for a breather.

So, on first sight it’s a very nice dividend earner, as long as you have faith and don’t ask too many difficult questions how they perform this magic. They’ve been doing it for quite some time, and in difficult circumstances, so they do have a track record.

Tags: First look

2 responses so far ↓

  • 1 BUYIOC // Dec 24, 2011 at 4:32 pm

    16.8% dividends from the new Annaly…

    Annaly is one of my favorite “virtua l banks.” I like it because it takes on no credit risk. Through the years, Annaly has made my True Wealth readers huge returns.

    But there’s a new company doing this same type of thing… And it has done it better than Annaly…

    The company is Two Harbors Investment (TWO). Right now, Two Harbors pays a higher dividend than Annaly does: 17% vs. 14%. And it takes on less leverage than Annaly. It also appears to be dramatically less risky in the face of rising interest rates.

    Two Harbors is run by Steve Kuhn. Steve has made a killing buying distressed assets. His specialty is finding mortgage bonds that trade at enormous discounts. This skill is what allows Two Harbors to pay such a healthy dividend.

    Right now, TWO has 80% of its capital invested. The other 20% is invested in mispriced bonds. Two Harbors calls its mortgage bonds-business model a “hybrid” model, investing in both guaranteed and non-guaranteed bonds.

    As the CEO of Two Harbors, Thomas Edwin Siering, recently said, “It’s the beauty of the hybrid model. We can just go where the grass is green.”

    Two Harbors shares have dipped recently, so you can now buy the stock near book value. That’s incredibly cheap for a company that makes money so easily.

    Annaly is the original “virtual bank.” But Two Harbors is quickly making a name for itself. If you’re after a higher yield, TWO is a great buy.

  • 2 admin // Dec 24, 2011 at 7:08 pm

    Thanks for that comment. Hmm, “mispriced bonds,’ I like that one..

    We’ll have a look at TWO then. Although at the heart of it, they’re a bit like black boxes, as it’s really difficult to judge their assets. But they certainly pay top dividend!