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Annaly Capital: Preferred Plays for Income

11/28/2017 5:00 am EST

Focus: BONDS

Jack Adamo

Editor, Jack Adamo's Insiders Plus

We already own quite a bit of preferred shares issued by Annaly Capital Management (NLY), but I'm ready for more. The company has come through decades of problems in the economy without a scratch, notes Jack Adamo, income expert and editor of Insiders Plus.

At its current price of $25.42, Annaly Capital Management Inc. 7.50% Series-D Cumulative Redeemable Preferred Stock (NLY-D) yields 7.38%. The stock is past its redeemable date, so if it were to be redeemed in the next week or so we could take a very small loss (less than 1%).

About half the quarter is passed and the quarterly dividend is 47¢, so we're on the hook for about 20¢ a share. After just one full quarter, we have no more risk from that.

I think we can make it for those six weeks and many weeks and quarters to come. The company has two other series of preferred stocks that are redeemable, and both have higher coupons (that is, they pay higher interest) than the Series D.


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I can't imagine a scenario in which Annaly would redeem the lower coupon issue first. Nor can I imagine they would redeem all three series at once, draining $935 million of capital from the company in one shot. Part of executive compensation at Annaly is based on total equity, including preferred equity.

I've been following the company for more than 20 years and I don't recall it ever redeeming shares without issuing new ones to replace them. That takes time and it takes notices to the market. Hence, I think we are 99.99% assured of not losing any money here. How long the shares remain outstanding is beyond my ken, but I think it will be years.

Annaly had a bad Q3 it covered its preferred dividends "only" 12-times over. (Results are always volatile quarter to quarter.) Using Comprehensive Income, preferred dividends were covered 18-times over. Buy Annaly Capital 7.50% Series-D Preferred up to $25.75 in the High Income Portfolio.

If you would rather be assured of holding your investment for years, you could substitute more of the Annaly Capital Management Series-F Fixed-to-Floating Rate Cumulative Redeemable Preferred (NLY-F)  that we already own. It has a current yield of 6.57% and a yield to maturity of 4.79%, if it were to be redeemed in September 2022.

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