Annaly Capital Management, Inc. (NYSE:NLY) announces second-quarter earnings Wednesday, after the market closes.
Analysts expect the mortgage real estate investment trust to deliver earnings per share of 30 cents, one cent higher than a year earlier. In the last seven days, one out of the five analysts covering NLY stock upped their estimate for the quarter, so things are looking up for Annaly heading into earnings.
While its business currently appears stable, you might want to think twice about buying Annaly stock before or after earnings. Here’s why.
Watch Out for Dilution in Annaly
A common theme among mREITs is shareholder dilution. Many use equity financing more so than debt financing, which means from time to time its stock price slumps after an announcement of a stock offering.
On July 18, its shares dropped 4% on the news it was planning to sell 60 million common shares and possibly another nine million shares for the underwriters over-allotment, representing a 6.8% increase in the number of shares outstanding.
The phrase, “It is what it is” comes to mind. Before you buy into the status quo, consider that there are alternatives that can get you the income you require without overpaying for the stock.
Valuation Is High
The problem, some investors feel, is that NLY stock is currently trading at 1.1 times book value per share, much higher than its five-year average of 0.9.
Annaly’s stock isn’t cheap right now, which is a big reason why its management is selling so many shares. You’ve got to strike while the iron’s hot.
NLY stock hasn’t yielded less than 9% since 2007, and that’s saying something considering it traded as high as $21.20 in 2008. At the end of each of the last three calendar years, NLY stock’s yield has varied between 11% and 13%. As of Aug. 1, it’s 9.9%.
As I said, there are better alternatives.
NLY Stock Alternative No. 1
The first option is to buy a Mortgage REIT like the VanEck Vectors Mortgage REIT Income ETF (NYSEARCA:MORT) which charges 0.41% or $41 per $10,000 annually, invests in 26 mortgage REITs, including Annaly, the ETF’s top holding at 13.9% of the $144 million portfolio.
More importantly, at least for income investors, its 30-day yield is 9.4%, 60 basis points higher than the iShares FTSE NAREIT Mortgage REIT In Fd(ETF) (NYSEARCA:REM) and almost identical to Annaly’s payout.
NLY Stock Alternative 2
I believe that dividend yield isn’t nearly as important as dividend growth.
In the past four years, Annaly has paid out roughly $1.20 per year to shareholders, and while keeping the dividend constant helps preserve cash in times of difficulty, it’s not necessarily a winning recipe when combined with an expensive stock.
My second alternative, I believe, is a much better call for average investors.
The iShares Global REIT ETF (NYSEARCA:REET) invests in real estate equities and REITs in developed and emerging markets around the world. It currently has a 30-day yield of 3.9%, has 283 holdings invested across $397 million in assets, and charges just 0.14%.
Its performance over the last three years leaves a lot to be desired, up 5.5% annually, less than half the return of both the S&P 500 and NLY stock.
While that hardly seems like an endorsement for the ETF, it has done well in the past few months, a sign reversion to the mean could be taking over.
Bottom Line on NLY Stock
If you’re an experienced real estate investor, I’d probably wait for Annaly’s P/B to come down below 1; if you’re not, I’d be nervous about a yield approaching 10%, even if it’s lower than it has been in the past decade.
Oh, and if you own a home and have a decent-sized mortgage, I’d avoid all three because you’ve already got enough real estate in your financial picture.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.