Should you buy Annaly Capital Management stock right now? | Colorful fool

Many investors look to invest in dividend paying stocks. If you are one of them, real estate investment trusts (REITs) provide an excellent way to do this. This is because by law they must pay out at least 90% of their taxable income as dividends.

Most people think of REITs as investing in a variety of properties such as offices, retail space, apartment buildings, and data centers. But REITs can also invest in mortgages. These are called mortgage REITs (mREITs)

Annals of Capital Management (ONLY +1.38%) is an mREIT. The stock offers an attractive dividend yield of 12.8%. While it deserves attention, should you buy the stock?

Understanding business

Annaly Capital Management primarily invests in agency mortgage-backed securities (MBS). These usually represent a high – 80% range of her portfolio. They also own non-agency home mortgage loans and mortgage servicing rights (they service a pool of home mortgage loans in exchange for a portion of the interest payments).

These packages of mortgages bundled together have agency guarantees such as Fannie Mae, Freddie Macand Ginnie Mae. This provides a high level of assurance that Annaly will not have defaults that affect periodic payments.

If this seems like a low-risk investment strategy, Annaly will try to reduce returns through borrowing or leverage. According to generally accepted accounting principles (GAAP), it had a leverage of 7.1 times equity as of September 30.

Annaly typically finances its purchases with short-term debt. While leverage can increase returns, higher leverage also increases a company’s risk. This includes changing economic conditions and changing interest rates (ie, the narrowing of the spread between short-term and long-term yields).

Recent results

Annaly Capital Management’s results show steady improvement. Its third-quarter earnings available for distribution (EAD) rose to $0.73 per share. This is 10.6% more than a year ago.

EAD is a key performance indicator (KPI) because it measures how much money a company has to pay out dividends. It is calculated by making adjustments for certain items, such as one-time and non-cash expenses, to its GAAP net income.

Another KPI is EAD’s annualized return on equity, which was 14.7%. A year ago it was about 13%.

Volatile dividends

Annaly Capital Management stock currently has a very high dividend yield of 12.8% as of November 7th. S&P 500 index return 1.2%.

It currently pays a quarterly dividend of $0.70. The payout was covered by EAD from last quarter.

However, it is important to note that Annaly’s results fluctuate based on interest rates. That’s why its dividend payments change, up and down. For example, quarterly dividends were $0.88 in 2022 and fell to $0.65 the following year.

I’m putting it together

For those looking for secure and steadily growing dividends, Annaly Capital Management shares are not a good choice. Personally, the company’s results and dividends are too risky for me to invest in.

Annals of Capital Management

Today’s Change

(1.38%$0.30

Current price

$22:00

Key data points

Market capitalization

15 billion dollars

Daily range

$21.80 -$22.14

Range 52 weeks

$16.59 -$10:45 p.m

Volume

7.6 million

Avg. flight

7.3 million

Gross margin

99.61%

Dividend yield

0.13%

After all, while the Federal Reserve’s interest rate cuts could benefit Annaly, it also depends on how long-term yields change. And future rate cuts are not certain. Even the Federal Reserve, after cutting short-term rates at its last meeting, indicated that a cut at its next meeting was not guaranteed. If the central bank is not sure what action it will take, how can investors know?

That’s a lot of uncertainty, and the economy faces increased risks, including persistent inflation, increased layoffs and a prolonged government shutdown that has resulted in a lack of economic data.

So, despite the high dividend yield, I would sell the shares.