Dividends, Sustainability and Annaly Capital Management
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In the world of Real Estate Investment Trusts (REITS), Annaly Capital Management (NYSE: NLY) stands head and shoulders above the rest – and not just in size. With a market cap of about $15.6 billion Annaly is the largest in the industry by a wide margin. Chimera Investment (NYSE: CIM) at $3 billion and Hatteras Financial (NYSE: HTS) at $2.21 billion seem small in comparison.
There are additional differences between Annaly and the others too – differences that at first glance may give investors pause. Most REIT shareholders are in it for the income, and for good reason. Since REITs are required to pay out at least 90% of their profits to investors -- at least if they want to benefit from favorable tax treatment -- the dividend yields are through the roof. Annaly, Chimera and Hatteras pay shareholders a whopping 14.1%, 14.6% and 12.5%, respectively.
The better portfolio diversification -- by geography and asset type -- that kind of size allows for is certainly a positive. But Annaly is expensive – real expensive – relative to others in the industry. Annaly is trading at 6 times the valuation Chimera is, and almost 5 times Hatteras’ P/E, which means Annaly must be woefully overpriced, right? The answer isn’t quite as cut-and-dried as you might think.
For as long as REIT investors can remember, Annaly has chosen to go their own path. They tend to invest in longer term, fixed mortgages in addition to the assets, property management and related services they provide. Management’s abhorrence of aggressive investing to make a quick buck will sometimes position Annaly as they are now – seemingly a bad choice vs. others in the sector. Now add in the recent dividend decrease company management unveiled in Q4 -- albeit a slight one – and Chimera or Hatteras look even better in comparison. Or so it would seem.
Two of the most important factors to consider when exploring REIT’s – time horizon and risk tolerance – lend themselves to Annaly. Most investors in REITs are seeking income so most shareholders tend to be long term investors. With that being said this investment class in particular needs to be measured just a little bit differently than most. A long term management approach is why Annaly was able to weather the real estate storm that began in 2008 better than most – and it was in large part due to the firm’s conservative management approach.
And if you’re an investor that has trouble sleeping at night thinking and re-thinking about your portfolio – even less aggressive portions of it – a long term investment perspective is what you should be looking for in a REIT management team.
Yeah, Annaly appears overpriced relative to others right now - and though forward earnings estimates are for a much more respectable 7.7 times earnings - there are more important things to consider. Even with the slight drop in payout the income Annaly generates for their shareholders is tremendous, it's sustainable and management's approach to their business is exactly what long term investors should look for. Pretty good match, all things considered.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.