Shares of Annaly Capital (NLY) are slipping in early trade this morning after JPMorgan analyst Andrew Wessel downgraded the real estate investment trust on valuation.
Wessel downgraded the stock to "Neutral" from "Overweight," and said the stock has recovered to a fair value over the last few months. Wessel thinks the Federal Reserve is going to raise interest rates later this year, which would increase Annaly's expenses and reduce its profits.
Fair enough. But Annaly withstood seven straight quarter-point increases in the federal funds rate during 2004-2005 before the dividend was materially impacted. Furthermore, Annaly is quite efficient at using 2-year swaps to lock in its funding costs, so the mere threat of future rate increases will have no near-term impact on the Company's results.
If one thinks of Annaly's cycle of results as a U-shaped curve, then perhaps we've hit the top of the curve and will be coasting downward for the next few quarters. However, there is still a long way to go before Annaly hits the ground -- and plenty of time to enjoy juicy dividends before the tightening ends the ride.
At $16/share, Annaly's forward dividend yield will approach 12%. Investors with an eye towards income versus capital appreciation might be interested in coasting down with Annaly in the near-term.
1 comments:
Do you prefer NLY to CMO?
With the deleveraging of both of the above I think this dividend cycle could be extended. These mreits never did hit the 2X book that they have in previous cycles, and i would think that at worst they are a good place to park cash now, with not alot of downside risk.
Also do you really think with the economy slowing and the banks problems, Bernanke is going to tighten any time soon? I do not!
So my .02 is to buy CMO, before xdiv and the russell rebalancing next week.
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