8.8% Yield On New Annaly Capital Management Preferred Share

Annaly Capital Management's new preferred share, NLY-J, has appreciated to $25.53, now yielding 8.4% to call (down from 8.9% at launch) with a stripped yield of 8.8%. While its five years of call protection and perpetual nature offer upside if interest rates decline without a recession, potentially pushing prices above $26, its lack of maturity makes it less favorable than baby bonds in a rising rate or recessionary environment. The analysis highlights NLY-J's unique positioning relative to other fixed-income alternatives, noting its potential for higher after-tax income for certain investors.

Analysis

Annaly Capital Management's newly issued preferred share, NLY-J, has experienced rapid price appreciation from its initial $24.90 to $25.53, compressing its yield-to-call from approximately 8.9% to 8.4%. The security maintains a stripped yield of around 8.8%, supported by an annual dividend of $2.21875 per share. NLY-J's primary appeal lies in its five-year call protection and perpetual nature, positioning it favorably in a falling interest rate environment; a scenario with multiple Fed rate cuts without a recession could push its price above $26.00. However, this structure presents a key risk, as its lack of a maturity date makes it underperform relative to baby bonds in a rising rate or recessionary scenario. Compared to other fixed-rate preferreds, NLY-J holds a superior risk rating of 1, though alternatives like PMT-C (risk rating 3.0) may offer greater capital appreciation potential due to trading at a discount to call value. The investment thesis for NLY-J is therefore heavily dependent on an investor's macroeconomic outlook on interest rates and economic stability, with an additional consideration for its potentially favorable after-tax income treatment in taxable accounts versus alternatives.

Key Decisions for Investors

• Investors should weigh the compressed 8.4% yield-to-call against the security's strong 5-year call protection and low risk rating relative to peers in the mortgage REIT sector.
• For those anticipating declining interest rates without a recession, NLY-J offers potential for modest capital appreciation above $26, though higher-risk discounted preferreds may offer more significant upside.
• Investors concerned about a potential recession or a shift to higher interest rates should consider alternatives like baby bonds, which provide a similar yield but greater principal protection due to their seniority and fixed maturity dates.
• Individuals investing through taxable accounts should assess the potential after-tax income advantage of NLY-J's dividends compared to the interest income from corporate baby bonds.