Annaly's Diversification Efforts Aid Amid Market Volatility

Annaly Capital Management, Inc. NLY is benefiting from an improvement in the average yield on interest-earning assets. The company's prudent asset selection will drive its performance. However, the current market volatility and interest rate fluctuations are near-term worries. Additionally, the company's dividend reduction and an unutilized share repurchase program highlight concerns regarding capital distribution.

NLY's investment strategy is driven by the prudent selection of assets and effective allocation of capital to achieve stable returns. The company's investment strategy involves traditional Agency mortgage-backed securities (MBS), which provide downside protection, as well as investments in more non-agency and credit-focused asset classes that aid in enhancing returns. Also, a scaled MSR platform will continue to benefit from a low prepayment environment. As of Mar 31, 2024, its investment portfolio aggregated $87.5 billion.

Further, the company is focused on diversifying its investment portfolio. The company seeks to stabilize and diversify its investment portfolio through investing in Agency MBS and residential credit. NLY's strong liquidity position enables it to reinvest in the franchise. In 2022, it sold its Middle Market Lending portfolio and exited its commercial real estate business. Through these exits, Annaly was able to enhance capabilities across its core housing finance strategy.

Further, Annaly is focusing on improving its liquidity and reducing leverage. The company showcased a strong liquidity position in the first quarter of 2024. The company maintains an unencumbered asset portfolio, aggregating $5.3 billion, which can readily provide liquidity in times of adverse market conditions. Hence, with a decent balance sheet, the company is well-equipped to support its business, even in times of economic stress and market volatility.

NLY enjoys a diverse funding profile in the industry. Its main sources of financing are repurchasing agreements and various forms of equity. Arcola Securities, its wholly-owned subsidiary, enters repurchase contracts on behalf of the company. This helps it enjoy flexibility in the opportunistic enhancement of its portfolio. Annaly maintains a strong presence in the residential securitization market through its residential credit business. This will enable the company to capitalize on the improving outlook for residential mortgage finance. This will support Annaly's asset generation strategy.

Shares of Annaly have declined 2.7% over the past six months compared with the industry's decline of 11.1%.

Image Source: Zacks Investment Research

At present, Annaly carries a Zacks Rank #3 (Hold).

The operating performances of mREITs depend on conditions prevalent in the broader financial markets and the macroeconomic situation. Any volatility in the mortgage market, unfavorable changes in the shape of the yield curve, interest-rate volatility and deterioration of the generic financial conditions may affect the performance of the company's investments. The Federal Reserve kept its key interest rate unchanged and scaled back its forecast from three rate cuts to just one this year after an inflation pickup in early 2024. This might not serve as a good indicator for the company.

Annaly's capital distribution plans keep us apprehensive. In January 2022, it was authorized with a $1.5-billion share repurchase plan, valid through Dec 31, 2024. However, the company has not repurchased shares under this plan since the announcement. Moreover, it slashed its first-quarter 2023 cash dividend by 26% to 65 cents per share due to a moderation in earnings available for distribution. Earlier, amid the pandemic-led market volatility, Annaly slashed its second-quarter 2020 dividends by 12% to 22 cents in June 2020.

Stocks to Consider:

A couple of better-ranked stocks are Ellington Credit Company EARN and Chimera Investment Corporation CIM.

Earnings estimates of Ellington Credit Company have been revised upward by 2% over the past 60 days. In the past six months, EARN's shares have gained 13.4%. Currently, the company carries a Zacks Rank #1 (Strong Buy).

Earnings estimates for Chimera Investment Corporation have been revised upward by 14.6% for 2024 over the past 60 days. Shares of CIM have gained 6.7% over the past three months. Currently, the company carries a Zacks Rank #2 (Buy).

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