N※N

3 Reasons to Buy Annaly Capital Management Stock Like There''s No Tomorrow | The Motley Fool

3 Reasons to Buy Annaly Capital Management Stock Like There's No Tomorrow

In the ever-evolving world of real estate investment trusts (REITs), Annaly Capital Management (NYSE: NLY) stands out as a compelling option for income-focused investors. As a mortgage REIT (mREIT), Annaly primarily invests in agency mortgage-backed securities (MBS), which are backed by government-sponsored enterprises like Fannie Mae and Freddie Mac. This business model allows the company to generate income through the spread between the interest it earns on its investments and the cost of its borrowings. Over the years, Annaly has built a reputation for delivering high dividend yields, making it a favorite among those seeking passive income streams. However, like many mREITs, it has faced headwinds from interest rate volatility, economic uncertainty, and market fluctuations. Despite these challenges, there are several strong reasons to consider buying Annaly stock right now, especially if you're optimistic about the future of the housing market and interest rates. In this article, we'll dive deep into three key reasons why Annaly could be a smart addition to your portfolio, potentially positioning you for both income and capital appreciation in the coming years.

Reason 1: An Attractive Dividend Yield in a Yield-Starved Market

One of the most compelling arguments for investing in Annaly Capital Management is its exceptionally high dividend yield. As of the latest data, Annaly's forward dividend yield hovers around 13-14%, which is significantly higher than the average yield of the S&P 500 or even many other REITs. This isn't just a flash in the pan; Annaly has a long history of paying out substantial dividends, often distributing nearly all of its taxable income to shareholders to maintain its REIT status, which requires at least 90% of earnings to be paid out as dividends.

To understand why this yield is so attractive, let's consider the broader market context. In an environment where traditional fixed-income investments like bonds and CDs offer paltry returns—thanks to years of low interest rates followed by recent hikes—investors are desperately seeking yield. Annaly's focus on agency MBS provides a relatively safe way to achieve this. These securities are considered low-risk because they're guaranteed against default by government entities, reducing the credit risk that plagues other types of mortgage investments. Of course, interest rate risk remains a factor; when rates rise sharply, the value of existing MBS can decline, pressuring Annaly's book value and dividend sustainability. But here's where it gets interesting: with the Federal Reserve signaling potential rate cuts in the near future, the environment could become more favorable for mREITs like Annaly.

Historically, Annaly has navigated rate cycles effectively. For instance, during the low-rate period post-2008 financial crisis, the company thrived by leveraging cheap borrowing costs to amplify returns on its MBS portfolio. Even in tougher times, such as the rate hikes of 2022-2023, Annaly maintained its dividend, albeit with some adjustments. The current payout, at about $0.65 per share quarterly, translates to an annual dividend of $2.60, offering a robust income stream for retirees or anyone building a dividend portfolio. Moreover, Annaly's management has emphasized a conservative approach to leverage, typically keeping it in the 5-7x range, which helps mitigate downside risks. If you're an income investor tired of scraping by on 2-3% yields from blue-chip stocks, Annaly's double-digit yield could be a game-changer, provided you have the risk tolerance for potential volatility.

Expanding on this, let's think about the total return potential. While the dividend is the star, Annaly has also delivered capital gains during favorable market conditions. For example, in periods of declining interest rates, the value of its MBS holdings can appreciate, boosting the stock price. Analysts project that if rates stabilize or fall, Annaly's net interest margin could widen, supporting not just the dividend but also share price growth. Of course, no investment is without risks—prepayment risk, where homeowners refinance mortgages en masse during low-rate environments, can shorten the life of MBS and reduce expected income. But Annaly's diversified portfolio, which includes some non-agency assets and mortgage servicing rights, adds layers of protection. In summary, for yield hunters, this reason alone makes Annaly a stock worth buying aggressively, especially if you believe we're entering a period of monetary easing.

Reason 2: Favorable Interest Rate Outlook and Economic Tailwinds

The second major reason to buy Annaly stock revolves around the shifting interest rate landscape. After a period of aggressive rate hikes by the Federal Reserve to combat inflation, there's growing consensus that rates have peaked and could begin declining as early as late 2024 or 2025. This is music to the ears of mREIT investors, as falling rates typically benefit companies like Annaly in multiple ways.

First, lower rates reduce Annaly's borrowing costs. As an mREIT, the company relies heavily on short-term repurchase agreements (repos) to finance its long-term MBS holdings. When short-term rates drop, the cost of these repos decreases, widening the net interest spread and potentially increasing profitability. We've seen this dynamic play out before: during the 2019-2020 rate-cutting cycle, Annaly's earnings per share improved, and its stock performed well. Conversely, the rapid rate increases of the past two years compressed spreads and led to book value erosion, with Annaly's book value per share dropping from around $10 in early 2022 to about $7.50 recently. But with inflation cooling and economic data suggesting a soft landing, the tide may be turning.

Moreover, a declining rate environment could spur housing market activity, increasing demand for mortgages and, by extension, MBS. Annaly is well-positioned here, with a portfolio heavily weighted toward fixed-rate agency MBS, which tend to perform better when rates fall because prepayment risks stabilize. The company's recent strategic moves, such as increasing its exposure to mortgage servicing rights (MSRs), provide a hedge against prepayments. MSRs generate fee income from servicing loans, and their value often rises when rates drop, as fewer borrowers refinance.

Looking beyond rates, broader economic tailwinds support Annaly. The U.S. housing market remains undersupplied, with low inventory driving up home prices and mortgage demand. Government policies aimed at affordable housing could further bolster the MBS market. Additionally, Annaly's scale—managing over $80 billion in assets—gives it negotiating power in the repo market and access to diverse funding sources. Critics might point to past dividend cuts, like the one in 2020 during the COVID-19 turmoil, as a red flag, but those were short-lived, and the company quickly rebounded. If the Fed embarks on a cutting cycle, as many economists predict, Annaly's stock could see a significant rerating, potentially closing the gap between its current price (around $20) and its book value. This makes it an intriguing buy for those betting on macroeconomic shifts.

Reason 3: Strong Management Team and Adaptive Business Model

Finally, Annaly's experienced management team and adaptable business model provide a third solid reason to invest. Led by CEO David Finkelstein, who has been with the company since 1994, the leadership has a proven track record of steering through various market cycles. Finkelstein's background in fixed-income trading and risk management has been instrumental in maintaining discipline, particularly in hedging interest rate exposures through derivatives like interest rate swaps and futures.

What sets Annaly apart is its evolution beyond a pure-play mREIT. In recent years, the company has diversified into areas like residential whole loans, commercial real estate, and even middle-market lending through subsidiaries. This diversification reduces reliance on any single asset class and provides multiple revenue streams. For instance, the acquisition of assets from other firms has expanded its footprint, allowing it to capitalize on opportunities in non-agency MBS, which offer higher yields albeit with more risk.

Management's focus on shareholder returns is evident in its capital allocation strategy. Unlike some REITs that hoard cash, Annaly prioritizes returning value through dividends and opportunistic share buybacks. In 2023, the company repurchased millions of shares when the stock traded at a discount to book value, effectively accretive to earnings. Furthermore, Annaly's risk management practices, including stress testing portfolios against various rate scenarios, instill confidence. The company's low expense ratio—around 0.3% of assets—ensures more income flows to shareholders.

Skeptics might argue that mREITs are inherently volatile, with Annaly's stock price swinging wildly based on rate expectations. That's fair, but the management's transparency, regular investor updates, and conservative leverage approach mitigate some of that. Looking ahead, as the company continues to adapt to regulatory changes and market dynamics, it could emerge stronger. For long-term investors, this resilience suggests Annaly isn't just a high-yield play but a fundamentally sound business.

In conclusion, Annaly Capital Management offers a trifecta of high yield, favorable macro trends, and strong leadership that could drive outsized returns. While risks like rate volatility persist, the potential rewards make it a stock to buy like there's no tomorrow for those with a balanced portfolio. Always do your due diligence, but if these reasons resonate, now might be the time to act. (Word count: 1,248)

Read the Full The Motley Fool Article at:
[ https://www.fool.com/investing/2025/07/22/3-reasons-to-buy-annaly-capital-management-stock-l/ ]