This 13%-Yielding Dividend Is on Very Shaky Ground

Core Viewpoint - Annaly Capital Management's high-yielding dividend, over 13%, is at risk as its earnings available for distribution (EAD) are barely covering the dividend payment, indicating potential for future cuts [1][6]. Financial Performance - Annaly reported EAD of $0.66 per share in Q3, slightly above its dividend payment of $0.65 per share, but down from $0.68 in Q2 and flat compared to the previous year [2]. - EAD has declined from $0.89 per share at the end of 2022 to $0.81 in Q1 2023, leading to a series of dividend cuts, including a reduction from $0.88 to $0.65 [2]. Market Conditions - The market for agency mortgage-backed securities (MBS) is improving, benefiting from the Federal Reserve's rate-cutting cycle, which allows Annaly to deploy equity capital effectively [4]. - The CEO indicated optimism regarding the operating environment, expecting strong risk-adjusted returns from their portfolio, particularly in agency MBS, which is projected to yield returns in the 15% to 17% range [4]. Leverage and Future Outlook - Annaly's economic leverage ratio decreased to 5.7 times, down from 5.8 in the previous quarter and 6.4 a year ago, suggesting a more conservative approach that may help maintain dividend coverage [3][5]. - Given the lower leverage and improving market conditions, the company may continue to earn enough to cover its dividend in the near future [5].