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Annaly Capital Management, Inc. Message Board

  • d_neely Jan 29, 2012 10:33 PM Flag

    EPS vs Dividend

    I am confused about why the EPS is about half of the dividend payout and how they can do this. I noticed that AGNC is the only reit stock i saw where the dividend is less than the EPS.
    I am scared of NLY since the dividend is so much greater than EPS according to YAHOO. Must be something about the nature of the stock category. Can something enlighten me about the ratio. I am doing ok with the stock but it still bothers me since I don't understand how any company can continue to pay out more than they take in.

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    • GAAP (Generally Accepted Accounting Principles) tells the truth about a company's profit. However, the IRS doesn't care about the truth. The IRS taxes a different measure, called Taxable Income (TI).
      In the case of REITs, 90% of annual TI must be distributed to shareholders to avoid losing REIT status, which would subject the company to corporation tax and that would be pretty much the end of dividends. The problem is that TI for REITs is very often much higher than the GAAP "truth". The difference arises because when REITs make a mortgage laon, they add a samll percentage to the interest rate to account for the probability of default and consequent losses. They have a lot of historical data to justify the amount they add. GAAP is computed taking into account those built in probable losses. But the IRS doesn't recognize unrealized losses, so TI is higher than "the Truth". So, NLY has been paying out more in dividends than it actually makes. The result of this is that book value has gone down about $1 over the last year. In the past, they have succeeded in selling more shares at a price over book value, which is accretive and cancels the loss. Skeptics say that makes it a Ponsi scheme, because it is new investors that are fact funding the dividend for existing shareholders. However, it is IRS rules that cause this.
      The discrepancy is greatest for mortgages with the highest built-in default allowance - sub-prime. That is why Sub-Prome REITS were at the forefront of the metdown. But you have IRS rules (i.e. Congress) to blame for at least 50% of the problem. I say string 'em up!

    • To get a good idea about how this stock works. Go to their website and spend hours going through the abundance of information available. At the bare minimum read their last earnings report and look at what they used to call "core earnings" (they don't call it that anymore, but it is the second paragraph) This is what determines tha dividend payout. GAAP net income is what is reported by Yahoo.

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