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

Annaly Capital Management Inc. (NYSE: NLY | NLY Price Prediction) 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.

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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.
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