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Annaly Capital Management Receives New Buy Recommendation

 

A Wall Street analyst initiated coverage with an Overweight rating. We’ve liked the company for a long time.

 

Annaly Capital Management (NLY: $6.49)

 

A major Wall Street analyst issued an initial Overweight rating on the company, noting significant upside potential, and placed an $8.25 target on the stock. With a book value of $7.50 as of March 31st, we agree. We have recommended Annaly as part of our High Yield Portfolio for a long time.

 

The REIT primarily invests in Agency Mortgage-Backed Securities (MBS), which made up 93% of its portfolio as of 1Q20. Governmental agencies, namely Ginnie Mae, Fannie Mae, and Freddie Mac, is notes and bonds composed of mortgages, and the debt is essentially backed by the full faith and credit of the United States.

 

Annaly (Target Price: $9) cut 2Q20’s quarterly dividend from $0.25 to $0.22. At the new level, this is a 13.5% yield.

 

There is an element of risk of course. This comes from the company borrowing money to buy MBS, with its leverage of over 6x in 1Q. 6x is normal for the company, as in years past leverage reached 8-10x. With long-term yields higher than the short-term yields, i.e. a normal curve, Annaly makes money. An inverted yield curve would hurt the company’s profitability. The good news is that the 2/10 spread is currently 49 basis points and we expect the curve to remain upward sloping. But watch the curve. It’s all about the curve.