NLY Stock: Is This 13% Yielder on Surer Footing?

I’ve reviewed Annaly Capital Management (NYSE: NLY) twice in the past four years. Each time, the stock got an “F” rating for dividend safety.

In 2022, I said investors should expect a dividend cut in the next year or two.

Management did in fact lower the dividend by 26% six months later.

I revisited Annaly in April of last year, restating what I said in 2022 – that it would cut its dividend in the next year or two.

So far, it hasn’t happened. The company actually raised its dividend from $0.70 to $0.75 in the second quarter of this year.

So are things now more stable for this 13% yielder?

Not according to the math.

Annaly Capital is a mortgage REIT with $107 billion under management. It has financed more than 1.3 million homes in the United States.

Annaly borrows money in the short term and lends it out longer-term. The difference in what it earns and what it pays to borrow (minus other expenses) is called net interest income, or NII. This is the measure of cash flow used by mortgage REITs.

In 2025, NII was expected to be $130 million.

To Annaly’s credit, it destroyed that estimate, generating $1.14 billion in NII.

While that’s a big achievement, there was a problem: The company paid out $1.88 billion in dividends, or 66% more cash than it took in.

This year, NII is forecast to dip to $1.09 billion and dividends paid are projected to jump to $1.95 billion.

Even though last year’s NII total was significantly better than what was expected, Annaly couldn’t afford its dividend then − and can afford it even less today.

The dividend cut from 2023 is another strike against the company’s dividend safety rating. The fact that it raised the dividend twice in the past two years doesn’t help. A company needs a 10-year streak of raising the payout to get a boost in its rating.

Besides, the two dividend increases were ill-advised, considering that the company’s NII comes nowhere near covering the current dividend.

Had the company skipped both raises and kept the quarterly dividend at $0.65, it still would have been paying out $1.76 billion, which far exceeds its NII.

That situation is only likely to get worse as the company increases its share count every year.

Although the NII situation has improved, Annaly still cannot afford its dividend. Not even close.

Dividend Safety Rating: F

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