Annaly, AGNC Dividends Seen Falling By 30%

Tickers in this article: AGNC NLY

NEW YORK (TheStreet) -- American Capital Agency and Annaly Capital Management saw dividend and price targets reduced by analysts as the mortgage REITs face ongoing skepticism tied to rising mortgage rates.

Sterne Agee analyst Henry Coffey lowered his price target on Annaly to $10.75 from $14.25, while dropping his target on AGNC to $22 from $25.50 in a report published Monday. Coffey expects Annaly's quarterly dividend to fall to 28 cents per share from 40 cents, and sees AGNC's falling to 78 cents from $1.05. AGNC and Annaly already slashed dividends in their most recent quarter.

Coffey cited the spike in 10-year Treasury yields on July 5 and "concerns over the vitality of REPO lines" which he argues "have done considerable damage to Agency residential mortgage backed securities values and the book values of agency-only mortgage Real Estate Investment Trusts. We have not liked agency only M REITs for some time and would continue to avoid this sub-corner of the M REIT market," Coffey wrote.

Coffey is officially neutral on Annaly and AGNC and in a June 11 research note he had predicted a "snap back" in those names. He made no mention of a snap back in Monday's note, however.

In a brief interview Tuesday, Coffey argued dealers have cut back REPO lending to AGNC and Annaly -- where they lend to the REITs using their existing portfolios of securities as collateral.

AGNC and Annaly borrow short term to buy longer-dated mortgage backed securities. When yields rise, that harms their business because borrowing costs go up quickly, while the longer-dated MBS on their balance sheets decline in value.

Also lowering his price targets on AGNC and Annaly was Citigroup's Donald Fandetti. In a note published Tuesday, he dropped AGNC to $20 from $30 and lowered Annaly to $12 from $15.

"We remain cautious on the agency stocks given our concern about higher rates going forward, though traders suggest much of the tapering risk is priced into the bond markets. And even if agency MBS REITs stabilize post-tapering, fears around the Fed hiking short-term rates could be lurking around the corner keeping sentiment negative. The bull case is that the economy is not strong enough for the Fed to taper yet, plus new investment spreads are wider and the stocks are below book value." Fandetti writes. He has a "neutral" rating on both names.

Annaly and AGNC were both up less than 1% in early trading Tuesday, to $11.95 and $21.21, respectively.

-- Written by Dan Freed in New York.