A Stock for (Almost) All Seasons
After a strong advance this year, stocks stumbled a bit recently. This is typical of December market action, but investors may have forgotten the usual year-end pattern under the bludgeoning of the last two Decembers. The historical action has been to mill about in early December, then to finish strongly as we approach January, with this bullish action spilling over into the New Year.
The last two Decembers were mired in nasty bear markets but we have been in a bull market since March and it feels as if we are now reverting to the historical strong finish. Until the economy picks up some additional momentum, I think we may be in for a more measured stock market next year but short-term action should be rewarding.
That still requires sensible choices. On one side of the channel, we still see anxiety ridden “investors” clinging to midget yields on insured deposits while the other side has fidgety speculators playing with things like Chinese start up companies. There is a middle way with stocks in companies like Annaly Capital Management (NLY-$18).
Annaly was founded in 1997 by some bright young people who resemble managers at Google if Google mangers wore suits. As a Real Estate Investment Trust, they were tested by the challenges of the real estate markets of the last two years but their stock kept bobbing around, never breaking $12 on the downside.
I think it has potential on the upside and its current yield of 15% makes it an attractive alternative to the Scrooge-like payouts of less venturesome securities. Its primary business is buying residential mortgage securities issued by Fannie Mae, Freddie Mac and Ginnie Mae. The company then leverages its returns by borrowing short-term at rates below those it receives from these securities.
The credit risk is virtually zero as these government agency securities come with either an explicit or implicit guarantee backed up by the federal government. The risk in borrowing short and lending long is always the impact of higher interest rates. With the Federal Reserve currently setting interest rates as close to zero as it can to stimulate an economic recovery, Annaly is in a sweet spot. Interest rate increases will not come without warning and it will have some time to decrease the leverage on its portfolio while also receiving some upside from the variable interest rate components of the securities it owns or buys.
Its dividend varies with its operations and was $.69 for the September quarter, up from $.60 for the preceding quarter. At a $.69 quarterly rate, that would be a 15% yield on its current stock price. So long as current interest rate spreads remain so favorable for the company, I think it probable that it may increase distributions. Even when conditions were bad, it never missed a quarterly payment although they got down to $.10.
Annaly, whose name is derived from an Irish family crest with the motto “Proceed without fear,” formed a subsidiary, Chimera (CIM-$4) in 2007 to engage in more speculative mortgage investments. The name comes from a mythological beast with the head of a lion, the body of a goat and the tail of a snake. It went public just in time to catch the brunt of the collapse of the real estate markets and its initial shareholders must have felt that it assumed all the identities of its namesake.
Chimera almost got to $20 after its initial offering but broke below $3 after the markets caved in. Investing directly in residential mortgages, its fortunes will vary from its mother ship, but analysts estimate earnings of $.46 this year. Quarterly dividends went from a high of $.26 in the spring of 2008 to a low of $.06 one year later and were $.12 this September with a probable increase in the works.
Both stocks are certainly more rewarding than generic fixed rate investments, particularly for investors willing to “proceed without fear” while keeping a weather eye on the Federal Reserve’s interest rate actions.