Mortgage real estate investment trust (REIT) Annaly Capital Management, Inc. (NLY) has been paying regular, quarterly dividends for more than two decades. The company paid a $0.22 quarterly dividend on July 30, which cumulates to an $0.88 annual dividend and yields 10.37%. Its four-year average dividend yield is 12.47%.

Because the Federal Reserve has indicated that interest rate hikes could come in late 2023, this could adversely impact NLY’s net interest spread. The uncertainty surrounding the timing of the Fed’s tapering also continues to worry investors. NLY has retreated 6.5% over the past three months and 4.4% over the past month to close Friday’s trading session at $8.49. In addition, NLY entered a definitive agreement in March 2021 to sell its commercial real estate business to Slate Asset Management L.P. So, its near-term prospects look uncertain.

Here are the factors that we think could shape NLY’s performance in the coming months:

Increasing Focus on Agency MBS

NLY operates via Annaly Agency group, Annaly Residential Credit Group, and Annaly Middle Market Lending Group. The company mainly focuses on its Annaly Agency Group, providing investors with access to the highly liquid agency mortgage-backed securities (MBS) market. This is expected to benefit NLY because  the portfolio is funded from diverse and attractive financing markets available to MBS, and the asset class is deep and has  government backing.

Weak Financials

NLY’s net interest income decreased 19% year-over-year to $322.86 million for the second quarter, ended June 30, 2021. The company’s net loss for the quarter came in at $294.85 million, versus  net income of $856.23 million in the prior-year quarter. Its loss per share came in at $0.23 compared to an EPS of $0.58 in the year-ago period. In addition, NLY’s book value per common share declined 6.5% sequentially to $8.37, and its net interest spread for the quarter came in at 1.62% compared to 3.34% in the first quarter (ended March 31, 2021).

Unfavorable Analyst Estimates

Analysts expect NLY’s revenue to decline 14.3% year-over-year to $511.70 million for the current quarter, ending September 30, 2021. Its revenue is further expected to decline 3.7% in its fiscal year 2022. The company’s EPS is expected to decrease 18.8% in the current quarter and 1.8% in fiscal 2022. Furthermore,  its EPS is expected to decline at a 3.3% rate per annum over the next five years.

POWR Ratings Don’t Indicate Enough Upside

NLY has an overall C rating, which equates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. NLY has a C grade for Momentum, consistent with its 6.5% loss over the past three months and 4.4% loss over the past month.

The stock has a D grade for Growth, which is in sync with analysts’ expectations that NLY’s revenue and EPS will decrease in the coming months. It also has a D grade for Stability, in keeping with its 1.30 beta.

In addition to the POWR rating grades we’ve just highlighted, we’ve also rated NLY for Sentiment, Value, and Quality. Get all the NLY ratings here.

NLY is ranked #11 out of 30 stocks in the REITs – Mortgage industry.

If you’re looking for top-rated stocks in the same industry with an Overall POWR Rating of Strong Buy or Buy, you can access them here.

Bottom Line

With a 10.37% dividend yield, NLY is  attractive to income investors. However, the company’s recently reported financials are not very promising, with both book value per share and net interest spread declining sequentially, among underwhelming other metrics. Also, analysts expect its EPS and revenue to fall in the current quarter. So, we think it’s wise to wait for a better entry point in the stock.

NLY shares rose $0.07 (+0.82%) in premarket trading Monday. Year-to-date, NLY has gained 6.57%, versus a 18.52% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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