Hedging a part of the expense. But the share price impacts returns as well. I.E. at a $5.00 share price NLY would need to return 22% to come up with the 30 cents.
You might be right about the market looking forward. The share price has fallen about 10% and the shares have a 20% discount to book value. That dismal performance might be the market pricing in anticipated rate hikes before they happen.
This method of compensating the executives did two things. It removed the issue of pay for performance, since the size of the portfolio determines pay, And secondly, if NLY management felt it needed to buy more mortgages etc, management could do a IPO or credit plan to add cash to grow the portfolio, guess what that does, increases their compensation. It was this change in compensation that moved me out of NLY and into AGNC a company that wants to improve shareholder value something Dennehan has not accomplished since taking over NLY.
Let me add, the past year IMO is a sample of how NLY will perform in a rising interest environment and the actual rate hikes are just rumored via the FED. We all know that the market tends to be a forward looking model that is why IMO the market is telling us what to expect with rising interest rates. When the actual rate hike starts, then the real NLY performance model for NLY in a rising interest world will begin to show up. I do not want to be a long term holder of NLY reinvesting dividends in this kind of market place.
Chuck and Bobby, all your research and understanding of NLY's business model just does not hold water in the current environment, there is no evidence anywhere that can model how NLY handles rising interest rates. This business model works real well with falling interest rates All we know for sure is that Dennihan will stil be one of the highest paid CEO's for trying to handle rising interest rates.
Bobby, so long as MS Dennihan can give shareholders peace of mind that the .30 cent dividend wont head south anytime soon due to hedging, then i'm content!
chuck_960: You've been a great poster to this site. Here is how I rationalize owning NLY, I don't know if this will help or fit your situation in any way, but I provide it to either reinforce your thoughts on NLY or to give you something to disagree with:
The one and only "fear" I have with owning NLY is that instance where the yield curve between short term rates and long term rates could change positions, thereby making the cost of money short term more than our longer term loans. The "fear" has been hedged against by the company through the sale of hedging instruments, which has held down our dividend and earnings for many quarters now. This is a conservative strategy employed by management, along with lowering the leverage rate to an extremely low leverage rate.
Having said that about the potential for an inversion in the yields between short term and long term, the upside is this: at the current dividend rate, or that of the rate utilizing an average share price very well above the current share price, we are still being paid a dividend well beyond anything available through any more conservative type investment. This is the risk/reward calculation you have to make. For example, say my average share price is $15, with the current dividend rate of $1.20 I am still getting an interest rate well above anything available elsewhere. The share price would have to plummet a lot further and the dividend would have to decrease a lot further to get anywhere near a yield in the 2-4 percent that you might be able to get on a move conservative investment, such as a utility.
In the end, it's a decision you have to make, but this is my somewhat amateur analysis (just as scam_alert guy will testify to). As long as you don't actually sell, I think my rationale works, at least for me.
I have more than a small gain and I started buying with the SP at 18. I trade some stock and sell options. I'm currently short 11 calls and 10 puts. Yesterday I sold 1000 #$%$ 10.32 and sold 10 May 29 10.5 puts for .3. I hope to get the shares back to collect the div. The basis for the 1000 sh becomes 10.2, lowering my overall break even.
The SP of the preferreds will fall when interest rates rise. If you can find historical data check what happened to preferreds in the fall of 2013. I loaded up on CYS-B at 20, but should have waited, because it went lower. If interest rates rise dramatically you may have to wait to maturity to get all your principal back.
Remember if you sell assets to get cash you now have less assets (mortgages under management. You use the cash to buy back common shares, the share price has gone up, but the assets under management are still lower. Compensation is linked to the total value of the portfolio assets, not the shareholder equity.
I owned NLY for several years watching the share price go down with every dividend. I just dumped the last of it. I have been going in to NLY preferreds C & D. They have held their share price and payed around 7.75%. I am convinced that the preferreds hold value while paying a pretty good dividend. Much better than watching the pps drop
My goodness. 1 year is not long term! I mean 5 years or more. I have no specific target price. Anything too much below 10 is about my bottom threshold. If it went up to 14, I would consider selling and reinvesting the profit. To me ,a stock price increase that is too big and not cashed out is kind of wasted. It doesn't mean much unless it is put to use or cashed out.
So what? You obviously are not invested in it. So why do you care? If you are so confident in the downside then you should be bragging about how many PUTs you just purchased
This has been a terrible investment for many how people see NLY as a good stiock to hold is beyond me. They give you 11% to hold this turd and the drop in the pps is greater. I don't get it here with these so called long termers.
Could you expound a little more on this: NLY management is paid 1% of assets under management through a separate management agreement. If management authorizes a share buyback, it would be good for shareholders, but bad for executive compensation.
My thinking is reducing the float will increase the PPS which in turn should increase executive compensation.
It is true that NLY could buy back its own shares at a 20% discount. The shares represent a portion of the bond portfolio So buying the shares is like buying mortgage backed bonds at a 20% discount. Since they are in the business of holding and trading bonds, you might wonder why they don't do a buyback. The answer is simple, NLY management is paid 1% of assets under management through a separate management agreement. If management authorizes a share buyback, it would be good for shareholders, but bad for executive compensation. If fact, the shares would never sell off to this level of discount if management would act on behalf of shareholders and take advantage of the arbitrage.