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Here's Why You Should Hold on to Annaly (NLY) Stock for Now

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Annaly Capital Management, Inc.'s (NLY - Free Report) financing and refinancing efforts to improve its liquidity are anticipated to boost its performance over the long run. On Jul 31, 2017, the company raised approximately $1.5 billion of capital through its common and preference equity offerings. Though a stock offering results in dilution of earnings, prudent investments in strategic assets are likely to help Annaly navigate through the challenging rate environment.

Annaly’s stock offering has created a capital buffer for the company and has also diversified its shareholder base. The company invested a major portion of these proceeds in agency assets and refinancing activities. It refinanced the higher cost 7.8% preferred stock that resulted in a 30 basis points reduction in its cost of preferred capital.

Annaly’s investment strategy is driven by prudent selection of assets and effective allocation of capital to achieve better returns. In line with this, the company plans to invest in assets, which will complement its agency investments by providing long-term floating-rate cash flows to shareholders and make it less volatile. With high quality agency assets in its profile, Annaly is well poised to ride on growth curves.

Annaly enjoys a diverse funding profile in the industry. The company’s $7.5-billion high-quality unencumbered assets provide adequate capital buffer. Its main sources of financing are repurchase agreements and various forms of equity. Moreover, RCap, the company’s wholly owned subsidiary, enters into repurchasing contracts on behalf of the company. This helps it enjoy flexibility in the opportunistic enhancement of its portfolio.

The company’s effective capital management technique has enabled Annaly to pay the same dividend per share for 15 consecutive quarters and maintain a decent return on equity. In fact, for the six-month period ended Jun 30, 2017, the company's dividend distribution announced for common stockholders amounted to $0.6 million. Given the Annaly’s financial position and lower debt-to-equity ratio compared to that of the industry, this dividend payout is anticipated to be sustainable.

In addition, Annaly’s shares have gained 24.7% year to date, substantially outperforming the 11% rally of the industry it belongs to. Also, its Zacks Consensus Estimate for 2017 earnings has moved up 1.7% to $1.20 in a month’s time.



However, with any further interest rate hike, the company might face higher borrowing cost. This, in turn, is expected to have adverse effects on its near-term prospects.

In fact, operating performance of mREITs, including Annaly, depend upon conditions prevailing in the MBS and broader financial markets, as well as on the macro economic situation. Adverse financial market conditions may result into de-leveraging of the global financial system and forced sale of mortgage assets. Further, concerns over economic downturn, geopolitical issues and unemployment may lead to increased volatility in the market.

The stock currently carries a Zacks Rank #3 (Hold).

Stocks to Consider

A few better-ranked stocks in the broader REIT industry include Hannon Armstrong Sustainable Infrastructure Capital, Inc. (HASI - Free Report) , Altisource Portfolio Solutions S.A. (ASPS - Free Report) and New Residential Investment Corp. (NRZ - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

While Hannon Armstrong has expected long-term growth rate of 12.5 %, Altisource Portfolio Solutions and New Residential Investment have expected long-term growth rates of 20% and 1%, respectively.

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