Mortgage real estate investment trust (REIT) Annaly Capital Management, Inc. (NLY) finances the purchase of residential and commercial real estate assets. The housing industry boom over the past year, coupled with increased investor attention on high-yield dividend stocks amid a volatile market, helped NLY’s share price to surge 32.2% over the past year, and 10.3% year-to-date.

However, current contradictory macroeconomic trends make NLY’s growth potential uncertain in the near term. While the Fed’s recent recommitment to holding interest rates at near zero levels in the near term makes NLY a coveted stock due to its relatively higher dividend yields, rising commodity costs could continue to pressure the housing market.

Also, rising construction prices have caused homebuilder sentiment to slump to a 10-month low, driving a slump in the industry. Consequently, analysts expect NLY’s revenues and earnings to decline because the demand for loan assets and asset-backed securities is expected to fall.

Here’s what we think could  shape NLY’s performance in the near term:

Mixed Dividend Story

NLY pays a $0.88 dividend annually, which yields 9.53% at the  current share price. It has approved a $0.22 quarterly dividend for the second quarter, payable on July 30.

The company’s forward dividend yield is 283.5% higher than the 2.49% industry average. Furthermore,  NLY’s 12.53% four-year average dividend yield is 341.3% higher than the 2.84% industry average. The company’s one-year and three-year yields on costs of 12.64% and 8.4%, respectively,  compare with the 3.61% and 2.52% industry averages.

However, NLY  has been reducing its dividend payouts over the past couple of years. NLY’s dividends have declined at a 9.8% rate over the past three years, and 12% over the past year. Furthermore, the company’s dividend payout per share is expected to decline 4.9% in the current year.

Bleak Growth Outlook

A $514.79 million consensus revenue estimate for the current quarter, ending June 2021, indicates a 12% decline year-over-year. The company’s revenue is expected to decline 14% in its  fiscal third quarter (ending September) and 3.2% next year.

The Street expects NLY’s EPS to decline 18.8% year-over-year in the next quarter (ending September 2021) and marginally in its fiscal year 2022. Also, the company’s EPS is expected to decline at a rate of 3.3% per annum over the next five years.

Consensus Rating and Price Target Reflect Marginal Upside

Of the six Wall Street analysts that rated NLY, three rated it Buy while three rated it Hold. Analysts expect the stock to hit $9.60 in the next 12  months, indicating a 3% potential upside from its last closing price of $9.32. The price targets range from a low of $9.00 to a high of $10.00.

POWR Ratings Reflect Uncertainty

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

NLY has a grade of B for Quality and Value, and D for Stability. The company’s trailing-12-month ROE and ROA of 37.58% and 5.27% compare with industry averages of 11.12% and 1.15%, respectively, justifying the Quality grade. Also, NLY’s 8.37 non-GAAP forward P/E ratio is 30.1% lower than the 11.97 industry average, consistent with the Value grade. However, NLY’s relatively high 1.30 high beta justifies the Stability grade.

Of the 29 stocks in the C-rated REITs – Mortgage industry, NLY is ranked #7.

In addition to the grades we’ve highlighted, one  can view NLY Ratings for Momentum, Sentiment and Growth here.

Click here to view the top-rated stocks in the REITs – Mortgage industry.

Bottom Line

NLY’s disinvestment of its commercial real estate business, which it announced in March, focusses its operations primarily  on the residential markets. While  mortgage rates are expected to remain favorable for home buyers in the near term as the Fed maintains its dovish stance, the rising cost of buying a house given  surging inflation rates has reduced the number of potential buyers. Also, because Treasury yields are rebounding following the Fed’s meeting yesterday, we think fixed-income investors should wait until the residential housing markets stabilize before investing in NLY.

NLY shares fell $9.32 (-100.00%) in premarket trading Thursday. Year-to-date, NLY has gained 13.25%, versus a 12.89% rise in the benchmark S&P 500 index during the same period.

About the Author: Aditi Ganguly

Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities. More...

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