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Inflation Is Back And Annaly Capital Will Likely Pay The Price

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The latest CPI study indicates that nan cardinal bank's conflict against ostentation is acold from over, and it whitethorn moreover participate a 2nd information successful 2023. With ostentation appearing to beryllium connected nan emergence successful January, nan Fed whitethorn beryllium forced to put its ft down and resume much fierce liking complaint hikes arsenic nan twelvemonth progresses.

A steeper liking complaint curve would harm owe spot portfolio values and nett liking spreads for illustration Annaly Capital Management Inc. (NYSE:NLY), implying dividend cuts and discount valuation. Please publication our erstwhile coverage connected NLY here.

Annaly Capital's nett liking dispersed shrank importantly successful nan 4th quarter, and an summation successful nan complaint of complaint hikes successful 2023 represents a important headwind for nan trust's valuation.

Inflation, Central Bank Policy And Impact On Annaly's Net Interest Spread

According to nan astir caller CPI report, yearly ostentation successful nan United States roseate 6.4%, exceeding expectations of 6.2%. Annual ostentation fell from a precocious of 9.1% successful June 2022 to a debased of 0.5% successful January. However, ostentation accrued 0.5% period complete period successful January.

Rent, food, and power prices are nan superior drivers of rising user prices. With ostentation still good supra nan cardinal bank's target of 2.0%, location is simply a beardown lawsuit for different fierce complaint hike astatine nan adjacent meeting.

Annual Inflation Rates

Annual Inflation Rates (Tradingeconomics.com)

In 2022, nan cardinal slope began an fierce complaint hike rhythm arsenic ostentation rates reached 40-year highs, and while nan gait of user value increases has slowed, higher liking rates stay nan biggest consequence for owe trusts for illustration Annaly Capital.

The Federal Reserve precocious slowed nan gait of its complaint hikes successful consequence to slowing inflation, but liking rates are apt to emergence successful 2023 arsenic ostentation remains a headache.

The Federal Open Markets Committee group nan national costs complaint astatine 4.50-4.75% successful February, aft raising liking rates for nan eighth clip since March 2022, including 4 consecutive 75-basis-point hikes. The Fed raised nan national costs complaint by 25 ground points successful February aft aggressively raising it passim 2022.

Federal Funds Rate

Federal Funds Rate (YCharts)

Annaly Capital's nett liking dispersed collapsed importantly successful nan 4th fourth owed to a steepening liking complaint curve caused by nan cardinal bank's push to power ostentation successful 2022.

Annaly Capital's nett liking dispersed fell from 2.46% successful 2Q'22 to 0.15% successful 4Q-22, reflecting nan importantly higher backing costs that owe trusts must now bear. Mortgage trusts carnivore nan brunt of nan cardinal bank's hawkish liking complaint policy, pinch disastrous consequences for profitability, because they trust connected short-term backing to put successful owe securities.

The costs of indebtedness superior was nan azygous astir important driver of Annaly Capital's crashing nett liking dispersed successful nan 4th quarter. The mean costs of Annaly Capital's indebtedness accrued to 3.71% successful 4Q-22, up from 2.38% successful nan erstwhile 4th and 1.12% successful 2Q-22.

Key Earnings Metrics

Key Earnings Metrics (Annaly Capital Management)

Annaly Capital's pay-out ratio deteriorated importantly successful nan 4th fourth owed to higher liking costs and a contracting nett liking spread. The pay-out ratio was 99% successful 4Q-22, implying that nan spot whitethorn person to trim its dividend successful nan coming quarters.

Dividend

Dividend (Author Created Table Using Trust Information)

Annaly Capital Is Set To Trade At A Discount To Book Value Again

Annaly Capital's book worth was $20.79 per stock successful 4Q-22, up 4.3% QoQ but down 34.8% YoY. With ostentation exceeding expectations successful January, nan owe spot whitethorn look different important summation successful backing costs successful 1Q-23, further squeezing Annaly Capital's nett liking dispersed and portfolio value.

The banal of Annaly Capital is presently trading astatine a 4.4% premium to book value, which I judge is unjustified fixed that nan astir caller ostentation study powerfully suggests that nan cardinal slope will proceed to hike aggressively done 2023 and that nan dividend pay-out ratio is flashing a red-hot informing signal.

Price To Book Value

Price To Book Value (YCharts)

Why Annaly Capital Could See A Lower/Higher Valuation

Inflationary pressures would beryllium relieved, removing nan request for nan cardinal slope to raise liking rates successful 2023. If ostentation does so ease, nan cardinal slope will person nary bully logic to aggressively raise nan national costs rate, which would beryllium bully news for Annaly Capital because it would relieve unit connected its portfolio values, peculiarly its nett liking spread.

However, fixed that ostentation remains importantly supra nan cardinal bank's ostentation target, nan marketplace must expect further complaint hikes.

My Conclusion

In this environment, Annaly Capital does not merit to waste and acquisition astatine a premium to book value. A higher-than-expected ostentation study powerfully suggests that nan cardinal slope will proceed to raise liking rates successful nan coming months, making owe spot indebtedness superior moreover much costly than it is now.

Because nan nett liking dispersed is already adjacent to zero and nan payout ratio is now astatine 99%, Annaly Capital whitethorn beryllium forced to trim its dividend successful nan short term.

This article was written by

On nan Pulse floor plan picture

A financial interrogator and avid investor pinch a keen oculus for invention and disruption, arsenic good arsenic maturation buy-outs and worth stocks. Keeping an oculus connected nan gait of precocious tech and early maturation companies, I constitute astir existent events and nan biggest news surrounding nan industry, and strive to supply readers pinch ample investigation and finance opportunities.

Disclosure: I/we person nary stock, action aliases akin derivative position successful immoderate of nan companies mentioned, and nary plans to initiate immoderate specified positions wrong nan adjacent 72 hours. I wrote this article myself, and it expresses my ain opinions. I americium not receiving compensation for it (other than from Seeking Alpha). I person nary business narration pinch immoderate institution whose banal is mentioned successful this article.

Editor: Naga



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