As Yield Curve Normalizes, Could a Dividend Increase Be in Store for Annaly?

Annaly Capital Management (NLY), a prominent mortgage real estate investment trust (mREIT), has been capturing investors' attention with its high dividend yields. As the yield curve normalizes, investors are wondering if Annaly could raise its dividend. Let's delve into the key metrics and recent developments to assess the likelihood of a dividend increase.


Key Metrics and Recent Developments

1. Book Value: Annaly's book value per share rose to $19.54 in Q3 2024, up from $19.25 in Q2 and $18.25 a year ago. This increase reflects the positive impact of lower mortgage rates and narrowing yield spreads between fixed-income assets and Treasuries.
2. Net Interest Spread: Annaly's net interest spread improved to 1.32% in Q3, up from 1.24% in Q2 and 1.18% a year ago. A wider net interest spread indicates better profitability, which could support a dividend increase.
3. Earnings Available for Distribution (EAD): Annaly generated $0.66 per share in EAD in Q3, sufficient to cover its $0.65 per share dividend. While EAD remained unchanged from a year ago, the company's ability to cover its dividend is a positive sign.
4. Constant Prepayment Rates (CPR) and Book Value: As mortgage rates decline, CPRs increase, leading to prepayment risk for mREITs. However, Annaly's projected long-term CPR jumped to 11.9% from 8.5% last quarter, indicating that it is prepared to manage this risk. The company's book value has also benefited from lower mortgage rates, further bolstering its financial position.


A Normalizing Yield Curve and Potential Dividend Increase

As the yield curve normalizes, Annaly could benefit from a steeper yield curve, investor inflows, and an improving technical backdrop. This could lead to increased spread income and the potential for higher leverage, bolstering the company's income and dividend payouts.

Annaly's management has hinted at the possibility of a dividend increase, stating that the current Fed plans to cut rates should be a good tailwind for its business and EAD. However, the company's primary focus remains on maintaining a strong balance sheet and managing risks associated with interest rate changes and prepayment risks.

In conclusion, as the yield curve normalizes, Annaly's strong financial performance and improving metrics suggest that a dividend increase could be in store. However, investors should monitor the company's progress and remain vigilant to potential risks, such as changes in interest rates and prepayment rates. By staying informed about Annaly's key metrics and recent developments, investors can make well-informed decisions about their investments in this high-yielding mREIT.