Analysis by Annaly Capital Management: is this monstrous dividend sustainable?

Annaly Capital Management is an American investment company that specializes in investments in mortgage-backed securities and other bonds. It is characterized by an extremely high dividend. Is it possible to keep it?

Basic overview

Annaly Capital Management $NLY has experienced fluctuating financial performance in recent years. In 2020, the company recorded a net loss of $1.9 billion, which was due to the impact of the COVID-19 pandemic on the markets. However, the company has a strong financial position, with a debt-to-equity ratio below 1 and a high dividend payout.

It has experienced a minor downturn

Annaly Capital Management specializes in investing in mortgage-backed securities and other bonds. Its strategy involves buying and managing these securities to achieve high returns for its investors. The company focuses on diversifying its portfolio and earning high returns with relatively low risk.

Annaly Capital Management operates in a competitive environment where it competes with other investment companies. Its largest competitors include American Capital Agency, AGNC Investment Corp and Two Harbors Investment Corp. Competition may affect the Company's performance and its ability to generate high returns for its investors.

Background

Investment companies such as Annaly Capital Management are regulated by the Securities and Exchange Commission (SEC) and must follow strict rules regarding investments and risk limits. This can affect a company's ability to make certain investments and limit its growth potential.

The market for mortgage-backed securities and bonds is becoming increasingly competitive. Annaly Capital Management strives to keep pace with market trends and invests in innovative products and services to stay ahead of the market.

Current situation and dividend

Annaly Capital Management announced on its recent earnings call that it plans to cut its dividend, which currently yields an incredible yield of about 15%. Management said it expects to reduce the dividend to a "more sustainable yield" of 11% to 12%.

This is to be expected. On its face, such a dividend is already too high. Add to that the current environment. The sharp rise in interest rates has made the environment very difficult for mREITs. But is the upcoming dividend cut just the beginning? Will more follow? While government or agency-backed MBS are very safe from a credit perspective (i.e., missed mortgage payments), they are vulnerable to interest rate risk. When mortgage interest rates skyrocketed and far exceeded Treasury yields, the value of MBS collapsed, leading to huge unrealized losses and a decline in the book value of Annaly, or the equity in which mREITs trade. For example, at the end of 2021, Annaly had total unrealized gains of more than $958 million. At the end of 2022, the company had unrealized losses of more than $3.7 billion.

Annaly is also facing pressure on its earnings because rising rates are leading to higher financing costs for asset purchases such as agency MBS. Funding costs rose more than 65% in the fourth quarter alone, and while the returns Annaly earns on its securities and loans are also rising, it hasn 't been enough to offset the sharp increase in funding costs. As we can see, the Fed is not relenting in its efforts to reduce inflation and is raising rates further.

Rates continue to be raised to historic levels. Source

On Annaly's recent earnings call, its management said it expects EAD to continue to face pressure. One of the main reasons is that funding costs have not yet peaked due to the rate hikes already implemented by the Fed. Funding costs tend to move higher with a slight lag and the Fed has not stopped raising rates since last March. If there are rate hikes, it will continue to be difficult for NLY to cover even the approximately 12% dividend.

Dividend History. Source

Disclaimer: This is in no way an investment recommendation. This is purely my summary and analysis based on data from the internet and other sources. Investing in the financial markets is risky and everyone should invest based on their own decisions. I am just an amateur sharing my opinions.