How Annaly Capital's 11% Yield Could See Much More Upside

Banking, finance, and taxes

Published: October 3, 2019 2:46 pm

Last Updated: January 30, 2020 3:04 pm

Annaly Capital Management Inc. (NYSE: NLY) is classified in the mortgage-backed securities portion of real estate investment trusts. This MBS-REIT comes with a very high dividend yield, and despite having sold from its highs this year. it has a market capitalization of more than $12.5 billion.

In August of this year, 24/7 Wall St. featured Annaly as being one of eight dividend yields of 10% that look as though they could have further upside on dividend hikes ahead. With a 10-year Treasury yield under 1.60% and with trillions of dollars of negative interest rates in Europe and Japan, many investors are looking for high-income alternatives.

On Thursday, RBC Capital Markets started Annaly Capital Management with an Outperform rating and a $10 target price. Annaly closed down 0.6% at $8.54 ahead of the call, and it was indicated up just 0.3% afterward.

RBC’s call by analyst Kenneth Lee was for upside of 17%. That was higher than the traditional 8% to 10% upside most S&P 500 companies are given with Buy and Outperform ratings at this stage in the bull market. It is an implied total return of over 28%, including its 11.5% dividend yield.

This REIT has a consensus analyst target price of $9.39, which has slid from $9.89 and from a then-current share price of $9.00 on August 20. While the dividend yield is closer to 11.5% now, the volatility in interest rates has created a situation in which some MBS-REIT investors are trying to figure out if their valuations should be higher or lower.

When Annaly reported earnings on July 31, it showed that its book value per common share was $9.33, with economic leverage of 7.6 times and with an economic return of 5.2% year to date.

New investors should consider two issues here. One is that RBC has acted as an underwriter of Annaly shares on two occasions in 2019. A second issue is that analyst reports with big above-consensus upside calls should always be used only as one step of a longer process in deciding whether a stock should be purchased.

Shares of Annaly Capital Management were last seen trading up 1.1% at $8.64, but trading volume was not heavy. The stock has a 52-week trading range of $8.07 to $10.51.