Why Annaly Capital shares plunged 33.5% in September

What happened

Annaly Capital Management (NLY -7.07%) September didn’t have a good month, with its stock price falling 33.5%, according to S&P Global Market Intelligence.

September was the cruellest month since the pandemic, as the S&P500 fell 9.3%, while Nasdaq Compound fell 10.5%, and the Dow Jones Industrial Average was down 8.8%.

So what

Annaly Capital, a mortgage real estate investment trust (REIT), fared considerably worse than the broader market as it turned out to be a tough month for housing stocks.

As a mortgage REIT, Annaly Capital invests in mortgages and mortgage-backed securities, generating income on interest payments. Its portfolio consists primarily of agency mortgage-backed securities (MBS), which are guaranteed by the federal government.

Annaly was particularly affected by the Federal Reserve’s latest rate hike in September, when it raised the federal funds rate an additional 75 basis points. That, in turn, had the effect of pushing mortgage interest rates to 6.8% in the last week of September, the highest since 2006.

This has slowed the housing market as refinances and new mortgage applications have fallen significantly, while house prices continue to rise – up 7.7% year-on-year in August . With high interest rates and high house prices, people are less inclined to buy or refinance, hurting mortgage REITs like Annaly.

Now what

It’s also worth noting that Annaly did a 1-for-4 reverse stock split in early September, which also caused the stock price to plummet. This means that four issued and outstanding shares of company stock will be converted into one share. So that means that as of September 26, the stock price has quadrupled to around $20 per share. Investors may have seen it as an attempt to shore up the fall in the stock price, which is down 45% year-to-date.

There isn’t much good news on the horizon for mortgage REITs, as the Fed is expected to keep raising interest rates until inflation drops. This means that mortgage rates will remain high, at least in the short term, which should further slow the housing market.

However, as a REIT, Annaly is required to pay out 90% of its earnings in dividends, so it remains one of the highest paying dividend stocks on the market. The reverse stock split quadrupled its dividend payout, from $0.22 to $0.88 per share, and its yield sits at an extremely high 18.8%.

Annaly Capital publishes its third quarter results on October 26.

Dave Kovaleski has no position in the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.

Sallie R. Loera