9 Analysts: NLY Stock Forecast $23 Per Share

NLY Stock Dividend and History

Annaly Capital Management pays an annual dividend of $2.60 per share, equating to a yield of 13.54 percent at today’s price.

While high as a percentage of share value, the actual distribution has been drifting gradually downward for several years. In 2012, for example, NLY paid $1.80 per share quarterly. The yield at that time was over 12 percent.

It’s critical to be aware that investors may not have seen the end of Annaly’s dividend cuts. In Q1, the company pared back its distribution by 26 percent, dropping it from $0.88 to $0.65 each quarter. The previous quarterly dividend had remained unchanged since the last dividend cut in 2020.

Is Annaly’s Dividend Safe?

On the surface, NLY’s new, lower dividend level seems to be sustainable. The company’s current dividend payout ratio is 52 percent, a reasonable level that doesn’t seem to put too much pressure on earnings.

Annaly management also justified the most recent cut by explaining that it would allow more room for reinvestment, introducing the possibility that earnings could rise in the future.

However, for investors focused on Annaly’s dividend, the ongoing history of cuts could still be a serious concern. Over the last decade, Annaly has slashed its distribution to just over a third of its previous level. Unless Annaly can improve its earnings available for distribution, there is little chance of significant dividend increases in the near future.

Slow Growth Is a Headwind For Dividend

In Q4, Annaly Capital Management reported a loss of $1.96 per share on a GAAP basis. The company was, however, positive for the year, reporting earnings of $3.93 per share. Total return for the year was -23.7 percent, despite a positive return of 8.7 percent for the final quarter.

Over the coming 12 months, NLY’s earnings are expected to rise by just 0.35 percent. As such, investors should likely plan on the company’s performance remaining flat during that period. The same appears to be true over the long term, as Annaly is projected to see earnings growth of -1 percent on average over the next 3-5 years.

One significant positive for investors is the fact that Annaly seems to be navigating the risks of the current market relatively well. The company has employed a fairly conservative hedging strategy to manage its risks and prevent losses amid interest rate volatility.

Annaly also liquidated its middle market lending portfolio in 2022 for a total of $2.4 billion. All told, NLY generated a 19.23 percent return on equity over the past 12 months. This is reasonably impressive, given the challenges of the past year for financial and real estate companies.

Annaly Investment Thesis: The Bearish View

The bear thesis on Annaly Capital Management reflects the fundamental risks of its business model. As a mortgage REIT, Annaly uses debt financing to purchase mortgage-backed securities. The yields generated by these instruments allow the company to turn a profit and distribute the resulting earnings to shareholders.

The weakness of this model, however, is that it is entirely reliant on the spread between borrowing costs and the yield on MBS instruments.

With the Federal Reserve continuing to increase interest rates, companies like Annaly could find themselves struggling under higher borrowing costs. The Federal Reserve is expected to raise baseline interest rates to around 5 percent this year and keep them elevated through at least 2025 to combat inflation.

Because of their debt-heavy model, mortgage REITs are generally considered to be among the highest-risk investments. While their yields are often exceptional, the companies themselves are heavily exposed to macroeconomic factors beyond their control. The high yields associated with these companies, therefore, tend to reflect the heavy risks of investing in them.

How High Will Annaly Stock Go?

What is NLY Stock Forecast? According to 9 analysts, NLY will reach a target price of $23, 19.8 percent above the most recent price of $19.20. The stock currently has a consensus hold rating, though none of the 12 analysts covering NLY rate it as a sell.

Annaly Capital Management appears to be more or less fairly valued at its current price. Although the company boasts a very low P/E of 6.7, this is offset by its unusually high debt-to-equity ratio of 6.8.

Given these factors, the risks involved in the stock and the high yield it pays, NLY seems to be trading at a price that reflects its fair value reasonably well.

Is NLY a Good Investment?

Although Annaly offers the potential for massive yields, the stock does not appear to be a buy at the moment. With higher interest rates likely to squeeze mortgage REITs over the next few years, investors could see their shares stagnate while the broader market moves back into bull territory.

Those seeking short-term income from their investments will likely find Annaly’s sky-high yield appealing. These investors, however, must also keep in mind the slow but steady decline of NLY’s distribution over the last several years. Yes, reinvestment could increase the company’s earnings and result in larger dividends in the future, but management’s track record in this area has not been particularly stellar.

NLY could also suffer from a continuation of institutional selling. Over the last 12 months, selling by institutional investors has outpaced buying by more than three times. This rapid pace of sales likely reflects higher perceived risks to mortgage REIT companies like Annaly.

Despite these challenges, NLY does not appear to be a sell yet. Investors who already own shares can still benefit from the company’s high yield and may even see improvements in share prices over the coming year. Those who hold the stock, however, may be wise to reinvest their dividends into other securities.

The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.