Annaly Capital Management (NYSE:NLY) offers an attractive dividend. At over 13%, the return is 10 times higher than that of the S&P500‘S. This higher reward potential comes with a higher risk profile.
That risk is clear when take a closer look at the mortgage REITs third quarter results. Here is the key number that puts its high-yield dividend at high risk of another cut.
Annaly Capital Management reported $0.66 per share in available-at-distribution (EAD) earnings in the third quarter, money that could be paid out in the form of dividends. That’s it only slightly above the quarterly average dividend payment of $0.65 per share. The EAD was flat compared to the same period a year ago and down of $0.68 per share in the second quarter.
On the one hand, Annaly is currently earning more than its dividend. However, EAD has steadily declined over the years, leading to the company making a series of dividend cuts.
For example, EAD fell from $0.89 per share at the end of 2022 to $0.81 in the first quarter of 2023. That decline prompted the REIT to cut its dividend payout from $0.88 per share to its current level. level of$0.65. That was one of several dividend cuts the company has made in recent years years:
If Annaly’s EAD falls even further, the REIT will likely have to cut its dividend to a lower level again.
While EAD has fallen dangerously close to current dividend levels, some positive numbers suggest the company could maintain its payout in the coming quarters. For example, the REIT made enough money to cover its dividend even though it had less leverage during the quarter. It’s economical leverage ratio was 5.7 times, compared to 5.8 last quarter and 6.4 in the same period a year ago.
Meanwhile, market conditions for mortgage-backed securities (MBS) — pools of mortgages protected against credit risk by government agencies such as Fannie Mae – are improving. Annaly CEO David Finkelstein said in the earnings press release: “Agency MBS benefited from the onset of the Federal Reserve’s interest rate cuts. rate reduction cycle.”
As a result, he said, the REIT was “able to deploy equity raised during the quarter into the sector given the attractive new money yields.” That positions it to make more money.
The CEO Also said that “our entire credit correspondent channel continues to generate record production with exceptional credit quality, And our differentiated MSR [mortgage servicing rights] portfolio has consistently performed above expectations.”
By looking ahead, Finkelstein said: “We are optimistic given the improving operating environment and believe our portfolio is well positioned to generate strong risk-adjusted returns.” The company believes that all three platforms (agencies, home loans and MSR) can generate returns in the mid-teens in the current market environment. Notably, agency MBS returns are in the 15% to 17% range. that is an improvement over the 14% to 16% range seen earlier this year.
Given the lower debt burden and positive market environment, Annaly could continue to earn enough to cover dividend levels in the coming quarters.
Annaly Capital Management offers an attractive dividend. The problem is that earnings have fallen dangerously close to dividend levels, leaving the payout on shaky ground. On the plus side: market conditions seem to be on the rebound, indicating that the dividend is safe for the time being.
However, income investors need be careful as this is a higher risk, higher reward dividend. If market conditions deteriorate, Annaly may have to cut the dividend again.
Consider the following before purchasing shares in Annaly Capital Management:
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Matt DiLallo has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
This 13% dividend is on very shaky ground and was originally published by The Motley Fool
