This mortgage real estate investment trust makes its money by borrowing on the cheap, using it to buy higher-yielding mortgage-backed securities – called agency paper, which is backed by Fannie Mae , Freddie Mac and Ginnie Mae – and then pocketing the difference. Well, 10% of it. The other 90% is returned to shareholders.
When the credit crisis hit, and this is why Cramer turned sour on the stock, he feared Annaly would lose access to the cash that’s so vital to its business model. But that’s now over. The funding is available, and there’s a healthy spread between the rates at which Annaly borrows right now and those on the bonds it is buying, which is why Cramer said the dividend should be safe.
Not everyone agrees with his assessment, though. Some worry that the Federal Reserve will dump the $1.25 trillion in agency paper it bought to support the market, putting immense pressure on these bonds. Others think a wave of mortgage refinancing will hurt the higher-yielding bonds that Annaly buys.
But Cramer pushed back on both points. First, he doubts the Fed will unload its holdings all at once. Instead, the central bank will sell its paper over a period of, say, five years, and it won’t start until it first raises interest rates. And Cramer said that shouldn’t happen anytime soon. In terms of the refinancing, he thinks it would do “modest damage” at best to Annaly’s earnings.
There’s another argument against NLY as well, specifically Fannie and Freddie’s intention to buy as much as $430 billion in bad mortgages to reduce delinquencies, which people think could be enough to force Annaly to cut its dividend. But Cramer disagrees here, too. He said that these risks are already factored into the stock price and CEO Mike Farrell has taken the necessary steps to protect his firm from any potential problems.
Of course, never forget the power of the dividend. Over the last 10 years, NLY has returned 469% to shareholders who reinvested their dividends. The S&P 500 is actually down 18% over the same time period. And even if the stock goes nowhere, investors will still double their money in four and a half years with that huge yield, as long as they reinvest their dividends.
“I would put a quarter of your position on here,” Cramer said, “and then wait for the company to declare its next dividend in June before buying more.”
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