Annaly Preferred Shares Face Off

Annaly Capital Management's (NLY) preferred shares, particularly NLY-F and NLY-I, are highlighted as attractive investment opportunities for income-focused investors, offering a 9.5% yield with relatively low risk. Despite a slightly worse yield-to-call compared to NLY-G, NLY-F and NLY-I offer higher floating spreads resulting in larger dividends that compensate for the price difference, making them preferable unless shares are called almost immediately after purchase; the author believes that during periods of market stress, NLY-F and NLY-I typically hold up a bit better than NLY-G.

Analysis

Annaly Capital Management's (NLY) preferred shares, particularly series F (NLY-F) and I (NLY-I), are presented as attractive options for income-focused investors, offering substantial yields around 9.5% with a comparatively low risk profile, as indicated by a risk rating of 1 on a 1-to-5 scale. These securities rank above common equity in the capital structure, offering a significantly lower risk than common stock, especially within the mortgage REIT sector. While NLY-F and NLY-I exhibit less favorable yield-to-call values than the NLY-G series, their higher floating spreads result in larger dividend payments—NLY-F provides an annualized dividend of approximately $2.3881 and NLY-I $2.3871, compared to $2.1828 for NLY-G. This annual dividend premium of about $0.20 is projected to offset their marginally higher cost (approximately $0.20 to $0.24 more than NLY-G) in under two years, assuming the shares are not called. The primary uncertainty is the 30-day call provision, though the analysis suggests that the financial detriment is minor unless a call occurs almost immediately after acquisition; even one month outstanding can mitigate a negative yield-to-call outcome. NLY-G is deemed unlikely to be called due to its lower floating spread of 4.172%. Furthermore, NLY-F and NLY-I are expected to demonstrate greater price resilience during periods of market stress relative to NLY-G, with NLY-F noted as trading close to the analyst's target entry price.

Key Decisions for Investors

• Income-seeking investors may find Annaly's NLY-F and NLY-I preferred shares compelling for their high current yields and relatively low risk within the mREIT space, but should strategically select entry prices to mitigate potential call risk.
• Investors should carefully evaluate the trade-off between the superior dividend income from NLY-F and NLY-I, which can recoup their price premium over NLY-G in less than two years, and the inherent call risk, considered a 'coin flip' over the next one to two years for these series.
• For those prioritizing portfolio stability during market volatility, NLY-F and NLY-I are suggested to offer better downside protection than NLY-G; given NLY-F is currently trading near its target range, initiating or adding to positions at or slightly below current levels could be a consideration.