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Does the Annaly Sell-off Create Value Opportunities in REITs?

Chris Lau, Kapitall: Annaly Capital has one of the highest dividends in the industry and is down 30% this year. Are REITs worth a look?

It is not often a good sign to be bullish when a company cuts its dividend. However when Annaly Capital Management (NLY) cut its dividend by 14.3% on December 19, 2013, shares held steady within the $10 price range. 

The likely reason is that investors already anticipated the cut. However now that the dividend is $1.20 per annum and yielding 11.86%, it makes sense to ask whether investors should look at stocks like Annaly as an income investment opportunity?

Annaly is a real estate investment trust (REITs). The company has raised dividends steadily for more than a decade, and has a portfolio of agency mortgage-backed securities.















Value investors might like that Annaly trades at a big discount to book value. According to Kapitall’s number cruncher, Annaly has a book value of $13.66. It now trades at a price to book ratio of 0.7. The company is not the only stock in the sector to sell off, though shares are down nearly 14%, compared to the single digit declines for competitors:

Click on the interactive chart to view data over time.

For the year, Annaly is down 30.3% and this could entice investors holding the company to sell the stock in 2013 to realize losses. However the steep discount to book value in Annaly looks especially attractive in a high-valuation environment, especially among tech stocks. For example, Twitter (TWTR) is trading north of 56 times price to sales and pays no dividend at all.


Rising interest rates are often a cause for concern for the REIT sector, but so far, risks remain muted. The Federal Reserve will taper its stimulus by reducing bond purchase rates to $75 billion, down from $85 billion. The cautious move suggests interest rates will remain exceptionally low throughout 2014.

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