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Is it Wise to Hold Annaly (NLY) Stock in Your Portfolio Now?

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Annaly Capital Management, Inc.’s (NLY - Free Report) focus on prudent selection of assets and effective allocation of capital has enabled the company to achieve better returns. However, any adverse developments in the financial market conditions may result in de-leveraging of the global financial system and forced sale of mortgage assets, widening the spreads on mortgage backed securities (MBSs).

Notably, it invests in traditional agency MBSs as well as investments in more credit-focused asset classes. With majority of the company’s portfolio in the form of high-quality MBS and short-term investments, Annaly is well poised to ride on growth curves.

As part of its diversification strategy, the company focuses on strategic acquisitions. On May 2, the company announced its plans to acquire MTGE Investments in a cash-and-stock deal. This acquisition is a strategic fit as it offers ample business and asset diversification. In fact, it will increase Annaly’s investment options to 37 alternatives, and complements its agency and non-agency portfolios. Moreover, the Hatteras acquisition in July 2016 diversified the company’s investment and funding options. Such strategic moves are anticipated to stoke growth.

Annaly has a robust capital position. In fact, the company’s approximately $7.3-billion high-quality unencumbered assets provide adequate capital buffer. Also, a strong financial position has enabled the company to maintain a continued dividend payout for 18 consecutive quarters. Its lower debt-to-equity ratio as compared to the industry average also raises our confidence in the sustainability of this dividend payout.

The company enjoys lower expense levels on account of its large scale and diversification benefits. In fact, its operating expense to core earnings, excluding premium amortization adjustment (PAA), ratio of 15.9% is considerably lower than the mortgage real estate investment trust (mREIT) sector average. Moreover, the MTGE acquisition is expected to create immediate cost synergies by eliminating significant G&A expenses and a lower base-management fee.

However, the company is expected to deliver highly negative earnings growth in 2018 and 2019. This equates to higher uncertainty risks for its performance in the near term. In fact, over the past month, the stock has seen the Zacks Consensus Estimatefor 2018 earnings per share being revised 1.7% downward.

Furthermore, shares of this Zacks Rank #3 (Hold) company have underperformed its industry in the past three months. During this period, shares of the company have inched up 0.4% compared with the industry’s rally of 4.9%.


Lastly, we believe due to interest rate hike, the company may have to face higher borrowing cost and this will likely affect the company’s growth prospects, going forward.  In fact, during the first quarter, agency MBS spreads widened due to increased volatility and rising interest rates. This impacted the performance of the company’s mortgage portfolios.

Stocks Worth a Look

A few better-ranked stocks from the same space are PS Business Parks (PSB - Free Report) , Columbia Property Trust, Inc. (CXP - Free Report) and Lamar Advertising Company (LAMR - Free Report) . All three stocks carry a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PS Business Parks’ Zacks Consensus Estimate for 2018 funds from operations (FFO) per share has been revised 0.3% upward over the past month. Its shares have returned 15.1% in the past three months.

Columbia Property Trust’s FFO per share estimates for 2018 remained unchanged at $1.46 in the past month. The stock has gained 12.1% in three months’ time.

Lamar’s FFO per share estimates for the current year remained unchanged at $5.40 in the past month. Its shares have gained 1.8% in a year’s time.

Note: Anything related to earnings presented in this write-up represents funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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