A Fat 13% Yield That Can't Be Ignored: Annaly Capital

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I enjoy my home, and I enjoy strong income from the homes of others.Don't neglect helping others achieve their goals while achieving your own.The beauty of the market is that your success doesn't have...

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J Studios  Co-authored by Treading Softly We live in what many describe as an \"expert economy\". Most individuals strive to specialize in a specific skill set and rarely understand or know much outside of their silo. In prior generations, individuals were forced to have a broader but more general knowledge. It forced them to spend time learning more subjects and skills but at a lesser depth. The benefits and drawbacks of both economic and social setups are discussed at length in various places, but it is often extremely pronounced when it comes to investing. Many experts abound in specific aspects of the market, but when they try to move outside of their expertise, their analysis struggles to meet the mark. No sector is this more pervasive on Seeking Alpha than with mREITs. Many stumble on the intricacies and nuances due to a lack of knowledge and experience. The last time we wrote about this company, we tackled multiple specific myths and misunderstandings, dispelling them with the light of truth. Today, I want to revisit an old income-generating investment and check on its latest quarterly results. Let's dive in! Stable Earnings Set To Grow Annaly Capital Management, Inc. (NYSE:NLY) is a mortgage real estate investment trust, MREIT, that focuses on investing primarily in agency mortgage-backed securities, Agency MBS as well as Mortgage Servicing Rights, MSRs. Through these investments and the judicial application of leverage, NLY achieves yields of 13.5% on its common shares. NLY reported earnings with similar dynamics to what we have seen from peers in the sector. Book value was up to $19.54, up 1.5% from last quarter and up 7% year over year. Overall, NLY's book value has been relatively stable in 2024, ranging from a low of $19.25 in Q2 to $19.73 in Q1. This is less volatile than peer AGNC, which has seen book value range from $8.40-$8.84. NLY's book value has been within a range of 2.5%, while AGNC's book value has varied over 5%. The primary reason for this difference is NLY's exposure to MSRs, which tend to go up in value when interest rates rise, and decline in value as interest rates fall – the opposite of what agency MBS tends to do. With greater exposure to agency MBS, AGNC's book value is going to be more sensitive to changes in MBS. Similarly, EAD (Earnings Available for Distribution) has been stable, coming in at $0.66/share, while NLY has averaged $0.66/share for the past four quarters. Source NLY Q3 2024 Presentation While some peers have significant interest rate swaps maturing that are causing earnings to drift lower, NLY doesn't. They have an average maturity of 1.05 years on their next batch of swaps, and they are paying 3.33%. Source NLY Q3 2024 Supplemental Information Based on current trends, it is unlikely that the maturity of these swaps will materially increase interest expense. If the Fed is more aggressive than anticipated, interest expense could decline as those swaps mature. The stability of EAD right around the dividend of $0.65 is consistent with management's prior commentary on expectations. However, with the Fed starting its cutting cycle, there is a lot of reason to be more bullish about cash flow. Some peers, like Dynex (DX), raised their dividends in Q3. In the Q&A period of the earnings call, management was asked about the dividend, and here was their reply:  David Finkelstein: \"Well, as we sit here today, we feel good about the dividend. We're in a safe place here. We do expect to modestly earn a little bit more this quarter, the fourth quarter than in Q3. We expect our NIM to increase modestly. But look, we have to see how things play out. We need to understand the Fed's direction the market's direction before we can really understand where the dividend is going. Obviously, there's been dividend increases over the course of the last number of months in the sector, but a lot of that was coming from very low levels to get to not so low levels and some others that were essentially approaching or contextual with our dividend currently. But 13.5% roughly a dividend yield on book, I think, 13.3%. It's a solid return. And we're much more focused on economic return and making sure that we can deliver the dividend. And as the market and policy plays out heading into 2025, we do certainly recognize that the Fed's posture provides a tailwind to a lot of aspects of our business and certainly EAD, and we're hopeful that we do get the cuts that are priced in, and we'll see how it goes.\"  The TLDR version: NLY's dividend was already higher than some peers who recently raised their dividends, but earnings are rising so far this quarter. If the Fed does follow through with the currently expected path for further cuts, we expect that could lead to dividend hikes. NLY's portfolio is already heavily weighted towards higher coupon MBS. So, we can expect that the average yield NLY is receiving is not going to be climbing as quickly as it has been the past couple of years.   NLY Q3 2024 Presentation This means that from a cash-flow standpoint, it is all about the Fed cutting and reducing the interest expense. It is becoming increasingly likely that the bottom for the agency mREIT sector came in October 2023. Like many bottoms, it is only certain in hindsight. With the Fed finally starting its cutting cycle, and the yield curve inversion coming to an end, the headwinds on the sector are dissipating and that has been reflected in performance over the past year. The tailwinds are just beginning. Conclusion NLY currently enjoys steady coverage of its dividend by its earnings available for distribution. Looking to 2025 and beyond, if the Federal Reserve continues its rate-cutting cycle, NLY's management team is forecasting a dividend hike. So, you can collect over 13% yields today, see rising book value as agency MBS pricing continues to improve, and be on the lookout for a hike to your income next year if the sector conditions continue to improve as they have been. This is a situation where a lack of knowledge and misunderstanding keeps NLY's price low and yields higher. The risk-reward ratio is heavily slanted towards reward. When it comes to retirement, I want you to enjoy a strong, reliable income stream from the mortgages of others instead of constantly having to pay your own. Mortgages are powerful tools enabling individuals to achieve their dream of homeownership, but they are also powerful income sources enabling others to achieve their dream of passive income. Enjoy the income, provide liquidity to enable others' dreams, and live the very best retirement possible.  That's the beauty of my Income Method. That's the beauty of income investing.","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/2481187951"}