Annaly Capital: This 13% Yield Is On Sale

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Annaly Capital Management is well-positioned to benefit from the Fed's recent 50 bps rate cut, enhancing its net interest margins and book value growth.The mortgage REIT covered its dividend with ...

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Maxxa_Satori The central bank has started to shift on interest rates and handed the mortgage market a 50 bps rate cut in September. A beneficiary of this changing central bank approach to interest rates, in my view, is going to be Annaly Capital Management Inc. (NYSE:NLY), which just reported third quarter results and which owns a big portfolio of Agency mortgage-backed securities. The mortgage real estate investment trust covered its dividend with distributable earnings in 3Q24 and reported its second consecutive quarter of a positive net interest margin in the third quarter. Annaly Capital Management’s stock is selling for a tiny 2% premium to book value, and the mortgage trust book value rose 1% in 3Q24. My Rating History  My last stock classification for Annaly Capital Management was Buy primarily because the mortgage real estate investment trust was primed to profit from the central bank’s change with respect to short-term interest rates. The central bank indeed started to lower rates in September, which I anticipate will have a positive impact on the trust’s net interest margin moving forward. Portfolio, Fed Shift And Second Consecutive Quarter Of Positive Net Interest Margin  Annaly Capital Management invests primarily in Agency mortgage-backed securities and other, related mortgage investments such as Mortgage Servicing Rights and residential mortgage loans. As of September 30, 2024, the mortgage trust’s portfolio comprised $72.5 billion in Agency mortgage-backed securities, up 10% QoQ on strong rerating tailwinds for MBS. Mortgage-backed securities increase in value in a falling-rate environment, as do all fixed income investments.   Portfolio Overview (Annaly Capital Management) Annaly Capital Management’s net interest margin was 0.06% in the third quarter, down from 0.24% in 2Q24, but positive nonetheless. As a matter of fact, the mortgage real estate investment trust posted its second consecutive positive net interest margin, pointing to an improving margin trend now that the central bank has reached the end of its rate-hiking cycle. The Fed lowered interest rates 50 bps in September and the market widely anticipates more rate cuts to hit the mortgage market, allowing for further margin improvements at Annaly Capital Management. The trust’s Agency mortgage-backed securities are assets that are poised to benefit from lower interest (borrowing) rates, which could put Annaly Capital Management back on a path of sustainable book value growth.   Key Earnings Metrics (Annaly Capital Management Inc.) The consensus in the market is for short-term interest rates to fall below 5% next year and converge upon a 3% rate by 2027. In my view, with inflation quickly receding in the last couple of months, interest rates could fall much further and much faster than anticipated, and I would not be surprised to see borrowing rates fall below 2% by 2027. Inflation is the key figure to watch here and the trend, as we all know, has been quite positive in the last few months. In September, the U.S. inflation rate fell to 2.4% compared to August, leading to pressure for the central bank to keep lowering short-term interest rates.   Interest Rates (Annaly Capital Management) Dividend Pay-Out Metrics Have Deteriorated Faintly Annaly Capital Management’s earned $0.66 per share in distributable earnings in the second-quarter, down $0.02 per share QoQ. Despite the decrease, the mortgage real estate investment trust covered its $0.66 per share dividend with distributable earnings, leading to a dividend pay-out ratio of 98.5%. In the last twelve months, Annaly Capital Management paid out 97.7% of its distributable earnings and the trust earned its full dividend in three out of the last four quarters. In 1Q24, Annaly Capital Management under-earned its dividend only by $0.01 per share, causing the dividend pay-out ratio to temporarily rise above the 100% pay-out threshold. Since the pay-out metrics look robust, I don’t anticipate Annaly Capital Management to be at risk of a dividend adjustment heading into 2025.   Dividend (Author Created Table Using Trust Information) Tiny Premium To Book Value Annaly Capital Management’s book value as of September 30, 2024 was $19.54 per share, up 1.5% QoQ. Because the mortgage trust’s stock is presently selling for $19.84 per share, the book value multiple here is 1.01x. AGNC Investment Corp. (AGNC) is selling for a book value multiple of 1.05x. Both mortgage trusts have seen growing pressure on their valuations after earnings, though Annaly Capital Management’s 3Q24 earnings were particularly sound. As both mortgage trusts have the potential to expand their net interest margins in a falling-rate market, I think that AGNC Investment Corp. and Annaly could sell for 1.10x book value which in the case of NLY equates to an intrinsic value, based on the last reported book value, of $21.50. Why The Investment Thesis Might Be Faulty The central bank has started to cut rates last month and the consensus expectation is that the rate-hiking cycle has officially ended. Thus, more rate cuts should be anticipated, which in turn should improve the economics (spreads) of mortgage real estate investment trusts like Annaly Capital Management. A delayed rate cut timeline is therefore the most serious possible risk for the mortgage trust. In terms of dividend, I am not anticipating any major change to either the pay-out ratio or the dividend itself. My Conclusion I don’t see any particular reason for why passive income investors wouldn’t want to own Annaly Capital Management’s stock after 3Q24. The mortgage real estate investment trust covered its dividend with distributable earnings, for the third time in the last four quarters, and the net interest margin was positive in two consecutive quarters as well. While the dividend has a narrow margin of safety from a pay-out perspective, the high 13% dividend yield accounts for the risks here.  I think that Annaly Capital Management is poised to be a beneficiary of the Fed’s shift in interest rates, which should ultimately lead to a higher net interest margins and book value growth. Buy.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.1","shortVersion":"4.29.1","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2479455460"}