Warning: This High-Yield Stock’s Dividend Could Be at Risk

I’ve had a lot of requests lately to take a look at the dividend safety of Annaly Capital Management (NYSE: NLY), a mortgage REIT with a juicy 11.5% yield.

Nearly a year ago, I rated the company’s dividend safety an F. Sure enough, the quarterly dividend was cut from $0.45 to $0.30, a 33% haircut. In fact, the dividend has decreased by a nickel per share each of the last three quarters.

But is that $0.30 dividend stable?

The answer is no.

[ad#Google Adsense 336×280-IA]Annaly’s earnings continue to decline.

And remember, a REIT must pay 90% of its earnings in the form of dividends.

Lower earnings usually mean lower dividends.

In the third quarter, the company earned $0.28 per share, less than the $0.30 dividend recently declared.

A bit of good news was that its interest rate spread increased 3 basis points over last quarter.

A basis point is 1/100th of a percentage point.

Annaly makes money by borrowing at cheaper short-term rates and lending at higher long-term rates. The difference is the spread. The larger the spread, the more money the company makes.

The spread is down one basis point over the same period last year.

Next year, the company is projected to earn $1.14 per share, below the $1.20 in dividends that the current dividend rate suggests.

Over the past five quarters, core earnings have been between $0.28 and $0.32 per share. The problem is that lately it’s been at the lower end of the range with $0.28 in the third quarter and $0.29 in the second.

The analyst consensus for the fourth quarter is EPS of $0.27, rising to $0.28 in the current quarter, all suggesting that a $0.30 per share dividend might not be sustainable.

I am not going to hazard a guess as to which way interest rates are going and the impact that will have on Annaly. Right now rates seem stable, but when interest rates jumped last year, the company’s spread and earnings took a big hit.

I do expect rates to eventually rise further, but my crystal ball is out for maintenance. So when that will be I don’t know.

What I do know is that Annaly has cut the dividend several times in the recent past and earnings are not quite keeping up with its dividend.

I suspect that because the earnings are close to the dividend, management will do its best to sustain the $0.30 per quarter.

But if Annaly takes another hit to its profits, another cut is likely.

That being said, because the earnings have stabilized a bit, I’m going to upgrade the stock, but not by much.

Dividend Safety Rating: D

— Marc Lichtenfeld

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Source: Wealthy Retirement