HomeMost PopularWhy I Invested in Annaly Capital and the Potential for Growth

Why I Invested in Annaly Capital and the Potential for Growth

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High Yield, Low Risk Road Sign

Annaly Capital (NYSE:NLY) is a prominent mortgage REIT that, like other income stocks, has seen a decline in value recently. While Annaly has previously reduced its dividend when earnings were strained, I believe the current sell-off has been excessive.

After purchasing W.P. Carey (WPC) and Medical Properties Trust (MPW) at a discount, I have now added Annaly to my portfolio due to its attractive valuation and potential for revaluation as its net interest spread returns to positive territory. I see this as an oversold opportunity, especially considering the Relative Strength Index.

Previous Coverage of Annaly

Two years ago, I recommended Annaly as a buy for investors seeking a high-yield, long-term bond option. At that time, the mortgage REIT faced economic challenges due to rising interest rates, resulting in a negative net interest spread. However, I believe that the Federal Reserve will soon lower rates, which could drive earnings growth.

An Industry-Leading Mortgage REIT with a Strong MBS Portfolio

Annaly is one of the largest mortgage REITs for dividend investors. The company generates income from its investments in agency mortgage-backed securities, primarily long-dated (30-year) mortgages. As of the end of the June quarter, Annalyโ€™s agency mortgage-backed securities were valued at $71.6 billion.

Annalyโ€™s operating performance has suffered as a result of interest rate increases, with negative net interest spreads for two consecutive quarters.

The uptick in the Fed Funds rate has led to a significant decline in Annalyโ€™s net interest spread. In the June quarter, Annaly reported a negative net interest spread of 0.73%.

FY 2023

FY 2022

2nd quarter

1st quarter

4th quarter

3rd quarter

Net interest margin





Average yield on interest earning assets





Average GAAP cost of interest bearing liabilities





Net interest spread





(Source: Author)

While Annalyโ€™s net interest spreads are concerning, I expect the companyโ€™s financial situation to improve as the Federal Reserve lowers interest rates. This should stabilize the mortgage REITโ€™s spreads and potentially increase its share price.

Valuation of Annaly Compared to Other Mortgage REITs

Annalyโ€™s shares have experienced a significant decline recently, likely due to weakness in the REIT sector impacted by higher interest rates. However, I see this as an opportunity for investors looking for potential recovery.

Currently, Annalyโ€™s shares are trading at a 16% discount to book value, compared to the historical average price-to-book ratio of 0.98X. Investors can currently buy Annaly at a 15% discount to its historical P/B ratio. This suggests that Annaly could trade at book value in the medium term, resulting in a fair value between $20-21 per share. With the current share price at $17.48, there is potential for a 14-20% upside.

Additionally, based on the Relative Strength Index, Annalyโ€™s shares are currently oversold, indicating potential for technical revaluation.

Risks Associated with Annaly

There are several risks to consider when investing in Annaly. The companyโ€™s earnings and net interest spreads have been declining in a higher-rate environment. There is also a possibility of a dividend cut and continued trading at a discount to book value if the REIT sector continues to struggle.

Final Thoughts on Annaly Capital

While I typically focus on growth companies, the current market conditions in the REIT sector present an opportunity for value investors. Despite the eye-catching 14.8% dividend yield, I am investing in Annaly because its shares are trading well below their historical price-to-book ratio. I believe there is significant potential for recovery, resulting in a potential upside of up to 20% within a year, excluding dividends.

The recent dip in Annalyโ€™s share price aligns with my belief that the Federal Reserveโ€™s interest rate changes will lead to a re-rating of the companyโ€™s shares. With oversold shares and attractive valuation, now seems to be the right time to take advantage of the dip!

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