2023-04-22 03:36:29 ET
Summary
- Investors must reconcile their opinions (and those of analysts!) with relevant data such that tear-soaked portfolios might be avoided.
- Historically, NLY's high dividend yield has not adequately offset losses when shares declined over the long-term.
- Over the last twenty years NLY has had solid returns only when Federal Reserve Effective Funds Rate (EFFR) was falling, low, or stable.
Background
Earlier this week, I completed a review of 37 mREITs including Annaly Capital Management, Inc. ( NLY ) entitled Mortgage REITs Ranked By Quality (And Some Words Of Caution) . In that analysis, NLY appeared somewhat promising when compared to its peers based on valuation, earnings, return on equity, dividend yield, and payout ratio.
What does Epicurus have to with this?
You might imagine that a full-time investor monitoring multiple data streams on several screens would never get bored or have time for ancient Greek philosophy. In my case, you would be wrong. But more importantly, I find stoic thinking helps keep my decision making rational and centered on data. I keep a copy of The Principle Doctrines by Epicurus handy and refer to it several times every week. I try to apply the 22nd of Epicurus's 40 principal doctrines to every one of my investing decisions.
We must consider the ultimate goal to be real, and reconcile our opinions with sensory experience; otherwise, life will be full of confusion and disturbance.
I might paraphrase for investors as follows: we must consider the goal of making money to be real and reconcile our opinions (and those of analysts!) with relevant data; otherwise our portfolios will be full of losses and soaked with teardrops. With that said, here comes the data.
NLY Long-Term Performance
From April 1st 2003 forward, NLY price, dividends, total return with dividends reinvested (total return DR), and total returns without dividends invested (total return) are plotted below.
NLY Price, Dividends & Return
Author, SA Data
Share price (blue line) generally trends down while declining 72% over the period. Total dividends were almost $117 and total return w/o dividends reinvested (solid green line) is 95% vs SP500 total return of 369% over the period.
A cautionary tale for yield chasers: I suspect some investors and even some analysts could be called "yield chasers". Yield chasers would be wise to note, despite NLY's enticing yield, it was a very poor investment over the long-term.
A big takeaway for dividend investors: NLY Total return with dividends reinvested (dashed solid green line) was -9% over twenty years. Retrospectively, this makes perfect sense given that dividends would have been invested in shares that have trended down. Therefore, if you happen to own NLY or any volatile or declining dividend position, reinvesting dividends could be a very poor investment decision.
What conditions would make NLY a good investment?
Although NLY has generally been a poor-long term investment, over certain periods it has produced excellent returns. As an mREIT, NLY attempts to profit through real estate finance and mortgage backed securities ((MBS)). Historically, short-term NLY performance has been closely correlated to Federal Reserve Effective Funds Rate (EFFR).
NLY Price, Total Return, EFFR, and 6M Performance
Author, Federal Reserve and SA Data
Share price and total return are again plotted by the blue line and green line respectively with Federal Reserve Effective Funds Rate (EFFR) plotted in purple.
6M performance was calculated as a percent for each month based on the total return over the previous 6 months and is plotted in black. Note that 6M performance appears somewhat exaggerated by the scale difference between the left and right vertical axis. Further note, it is plotted on the right axis over a range from -40% to +40%. 6M performance is essentially the trend of NLY total return; its value approaches zero when NLY TR is generally flat, it is negative when NLY TR trends down, and it is positive when NLY TR trends up. 6M performance and its relation to EFFR will be discussed further below.
NLY 6M Performance and EFFR
Author, Federal Reserve and SA Data
EFFR is plotted in purple against the right axis while 6M performance is plotted in black against the left axis.
Over the last twenty years, two relationships seem apparent. NLY TR was likely to be painfully negative over most periods when EFFR was volatile or increasing. Conversely, NLY TR can be fabulous when EFFR is stable, decreasing or low.
One very good period from 6/1/2006 to 6/1/2010 is highlighted by the green arrows. Over that period, NLY 6M performance averaged almost 8% and NLY soundly outperformed SP500.
The Outlook for NLY
Since March of 2020, the Federal Reserve has raised the EFFR from essentially zero to its highest level since late 2007. So far this year the Federal Reserve has raised rates at each of its two meetings by 0.25% to reach nearly 5%.
NLY FY 22 results filed February 16th indicate that key profit metrics have recently declined.
NLY Key Profit Metrics
Author, NLY Filings
FQ422 Annualized GAAP return on equity per unit of GAAP leverage decreased almost 18% from that of FQ4 21 to -5.30%. Further, net interest margin and net interest declined sharply to 0.65% and 0.15% respectively. The complete results and even some optimistic outlook can be found in NLY's most recent Form 10-K here.
1 YR: NLY Price, Book Value, and Federal Funds Effective Rate
Author, SA & Fed Data
Over the last four quarters, NLY price performance and BV/Share appear well correlated in an opposite fashion to rising rites. Since mid April 2022, Fed Funds rate has increased from 0.3% to just over 4.8%. Over the same period, shares declined 27% while BV/Share decreased 23%.
Final Thoughts
Despite recent instability in the banking system, a top Federal Reserve official seems to have implied that another EFFR hike is forthcoming. Recently, New York Fed President John Williams signaled another EFFR hike . Speaking to a group of financial-industry professionals in Manhattan he said,
Inflation is still too high, and we will use our monetary policy tools to restore price stability.
History suggests NLY performance will be negatively affected by another EFFR hike, EFFR volatility, or even sentiment around EFFR. I will leave further speculation regarding NLY outlook and EFFR levels to investors and other analysts. My fellow Seeking Alpha analysts have recently provided some nuanced and insightful NLY coverage. Geoffrey Seiler and Labutes IR recently published Annaly Looks Well Positioned For When The MBS Market Turns and Should You Buy Annaly For Its High-Dividend Yield? respectively.
For further details see:
Annaly Capital Management: Long-Term Performance And EFFR