Annaly Capital: High-Yield Preferred Picks

08/14/2017 2:52 am EST

Focus: DIVIDEND

Jack Adamo

Editor, Jack Adamo's Insiders Plus

We've owned several series of Annaly preferred stock. Another one of them will be redeemed soon, probably by the end of Quarter 3. That's Annaly Capital Management 7.875% Cumulative Series A Preferred (NLY-A), says Jack Adamo, editor of Insiders Plus.


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The redemption has been announced; but no date has been given. The company just issued a new series with a lower interest rate, presumably to replace the A-shares with less expensive capital.

I'm fine with this. The new series pays well enough to keep me happy through its redemption date and beyond, if not redeemed.

The new series is fully named Annaly Capital 6.95% Series F Fixed-to-Floating Rate Cumulative Redeemable Preferred (NLY-PF). The shares pay the above indicated rate through 9/30/2022.

After that it may be redeemed or it will pay interest at a floating rate equal to the three-month LIBOR plus a spread of 4.993% per annum.

This is a much better deal than I've seen with any of the floating rate securities at the big banks, despite the fact that Annaly is considerably less leveraged than that gang of bandits.

Annaly reported earnings this week. As usual, they are very complex due to the labyrinth of derivatives the company employs to hedge interest rate risk. GAAP earnings fluctuate wildly quarter to quarter.

Only adjusted earnings show any semblance of organization. If I were a novice at this, I'd be afraid. If I didn't have strong support from historical precedent and smart money, I'd suspect I was crazy.

But a look at Annaly's long-term chart will show you the company has thrived in spite of its funhouse financials. As Jim Grant of Grant's Interest Rate Observer once said, "This stock isn't for widows and orphans" due to its gyrating earnings, but Grant recommended it years ago anyway, and given its returns, I doubt he regrets it.

Neither have we. We've done very well with our Annaly securities, and I feel sure we will do fine with this one too.  Buy Annaly Capital 6.95% Series F Preferred up to $25.15. Take a 3% position in the High Income Portfolio.

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