Don't Be Fooled By Annaly's High Dividend Yield.

Today I take a look at Annaly Capital Management, Inc. (NLY).  This is the fifth article out of fifteen on stocks that appeared as recommendations by Seeking Alpha contributor Insider Monkey.  Most of these stocks are 4-5% dividend yielding stocks, but NLY is different.  NLY and AGNC are mortgage REITs.  They follow some different government rules to avoid paying taxes, so they tend to have much higher dividend yield than regular businesses.  They are highly leverages and in my opinion are much riskier that most investor can appreciate.

Annaly Capital Management, Inc. (NLY)

Share price: $17.12

Shares: 970.08 million

Market capitalization: $16.61 billion

Bonds outstanding: $600 million, and there are some preferred shares.

What the company does - Formerly known as Annaly Mortgage Management, Annaly Capital Management is a real estate investment trust which invests in mortgage pass-through certificates, collateralized mortgage obligations, and other mortgage-backed securities. Interest and principal payments on the firm's investments are guaranteed by government-sponsored agencies including Fannie Mae, Freddie Mac, and Ginnie Mae. Annaly commenced operations in 1997 and is based in New York City.

DIVIDEND RECORD – Annaly has been cutting it dividend since its peak in 4Q 2009.  This ship is sinking.

Dividend: $0.57 quarterly

Dividend yield: 13.3% ($2.28 annual dividend/$17.12 share price)

Dividend payout ratio: 118% ($2.28 annual dividend/$1.92 recent Google Finance EPS) –OR- 300% using the six year average adjusted earnings ($2.28/$0.76)

EARNING POWER – $0.76 per share @ 970.08 million shares

(Earnings adjusted for changes in capitalization; Annaly issues stock all the time to stay afloat)

	EPS	Net income	Shares	Adjusted EPS
2006	$0.44	$74 M	168 M	$0.08
2007	$1.31	$393 M	306 M	$0.41
2008	$0.64	$325 M	507 M	$0.34
2009	$3.52	$1,943 M	553 M	$2.00
2010	$2.04	$1,249 M	625 M	$1.28
2011 (est)	$0.60	$422.53 M	970.08 M	$0.44

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.89	$696 M	791 M	$0.72
2011 Q2	$0.14	$117 M	828 M	$0.12
2011 Q3	($0.98)	($926 M)	949 M	($0.95)
2011 Q4 (est)	$0.55	$535.53 M	970.08 M	$0.55
2011 total (est)	$0.60	$422.53 M	970.08 M	$0.44

Six year average adjusted earnings per share is $0.76

Consider contrarian buying below $6.08 (8 times average adjusted EPS)

Consider value buying below $9.12 (12 times average adjusted EPS)

Consider speculative selling above $15.20 (20 times average adjusted EPS)

Annaly Capital Management is currently trading at 22.5 times average adjusted EPS.  This stock is speculatively priced.

BALANCE SHEET – Toxic assets falsely valued at full face value and a mountain of short term liabilities that are real.  The company’s equinity can disappear in moments.  The company possesses no plant, property, or equipment used to produce goods.  That means no real assets; just deficit spending government non-guaranteed mortgage backed securities.

Book value per share:  $16.40 ($15,910 M/ 970.08 M shares), but the equity is a phony number because the assets are artificially valued higher than the free market would price them.

Price to book value ratio: 1.04 (under 1.0 is good)

Current ratio: 0.04 (over 2.0 is good) ($4.311 B in current assets / $97.165 B in current liabilities)

Quick ratio: (over 1.0 is good) ($3.474 B in cash / $97.165 in current liabilities)

Debt to equity ratio: 6.14 (lower is better) (total liabilities / total equity)

Percentage of assets in plant, property, and equipment: 0%

CONCLUSION – Never own a bank or financial stock.  Annaly Capital Management suffers from all the same ills of American Capital Agency Corp. (AGNC). 

http://www.myhighdividendstocks.com/category/high-dividend-stocks/american-capital-agency-corp

They are borrowed short and lent long.  They are susceptible to bankruptcy if the financial markets seize up again like in 2008.  Their assets are toxic, but are carried at full face value even though the market would never buy them at such prices if the company where to be liquidated.  Stay away from the siren song of the high dividend yield.  Besides, the shares are speculatively priced based on earnings and book value.  If I can’t convince you to stay away from financial stocks, then at least buy under $9.00.

DISCLOSURE – I don’t own Annaly Capital Management, Inc. (NLY) and I never will.

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A First Look at Progress Energy (PGN). Specultively Priced For Sure.

Today I take a first look at Progress Energy.  This is the fourth stock out of fifteen that I’ll be analyzing based on a Seeking Alpha article by writer Insider Monkey.  When I first started my analysis I didn’t know that this company is in merger talks with Duke Energy (DUK).  Progress Energy is speculatively priced regardless of what happens to the merger.  Take a look below at my analysis to set up you watchlist on Progress.

Progress Energy Inc. (PGN)

Share price: $54.16

Shares: 295.01 million

Market capitalization: $15.98 billion

Bonds outstanding: $4.8 billion, but who knows how the merger with Duke Energy (DUK) will affect Progress’ outstanding debts?

What the company does - Progress Energy is a holding company providing electricity generation, transmission, and distribution through its regulated electric utility operating companies in North Carolina, South Carolina, and Florida. Its operating companies are Carolina Power & Light, which serves 1.5 million customers, and Florida Power, which serves 1.6 million customers.

Morningstar’s take - Progress Energy, which became one of the largest regulated utilities in the United States when Carolina Power & Light and Florida Progress merged in 2000, could become part of the largest U.S. utility if its $37 billion merger with Duke Energy DUK closes. Like Duke, Progress management has reconfigured its strategy and now has one goal: Take advantage of growth opportunities at its regulated utilities during the next decade. Merger or no merger, we think this strategy should produce more consistent returns and turn Progress into a classic income stock.

DIVIDEND RECORD – Progress Energy has been paying dividends since at least the year 2000.  The dividend was around 0.52 per share back then.  It missed on dividend payment in 2006 according to Google Finance.  It looks like the company just cut its $0.62 quarterly dividend down to $0.26, but that is not what is going on.  Progress Energy and Duke Energy are merging and the Progress management is trying to synchronize the dividend payment with that of Duke.  So this is a partial dividend payment (see http://www.alaskadispatch.com/article/progress-energy-board-directors-declares-partial-dividend)

Dividend: $0.62 quarterly

Dividend yield: 4.57% ($2.48 annual dividend / $54.16 share price)

Dividend payout ratio: 93.5% ($2.48/$2.65 recent Google Finance EPS) or 100% ($2.48/$2.47 avg adjusted EPS)

EARNING POWER – $2.47 six year average adjusted earnings per share @ 295.01 million shares

(Earnings adjusted for changes in capitalization)

	EPS	Net income	Shares	Adjusted EPS
2006	$2.28	$571 M	250 M	$1.94
2007	$1.96	$504 M	256 M	$1.71
2008	$3.17	$830 M	262 M	$2.81
2009	$2.71	$757 M	279 M	$2.57
2010	$2.95	$856 M	291 M	$2.90
2011 (est)	$2.86	$845.7 M	295.01 M	$2.86

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.62	$184 M	295 M	$0.62
2011 Q2	$0.60	$176 M	296 M	$0.60
2011 Q3	$0.98	$291 M	296 M	$0.98
2011 Q4 (est)	$0.66	$194.7 M	295.01 M	$0.66
2011 total (est)	$2.86	$845.7 M	295.01 M	$2.86

Six year average adjusted earnings per share is $2.47

Consider contrarian buying below $19.76 (8 times average adjusted EPS)

Consider value buying below $29.64 (12 times average adjusted EPS)

Consider speculative selling above $49.40 (20 times average adjusted EPS)

Progress Energy is currently trading at 21.9 times average adjusted EPS.  This stock is speculatively priced.

BALANCE SHEET – Yawn!

Book value per share: $34.59

Price to book value ratio: 1.57 (under 1.0 is good)

Current ratio: 0.97 (over 2.0 is good)

Quick ratio: 0.37 (over 1.0 is good)

Debt to equity ratio: 1.17 (lower is better)

Percentage of real assets: 65% of total assets in plant, property, and equipment

CONCLUSION – Progress Energy (PGN) pays a modest dividend yield at 4.57%.  It would become a 6% yielding high dividend stock with its current dividend at a price of $41.33.  Progress’ dividend payout ratio is quite high compared to the company’s average adjusted earnings of $2.47 per share.  The company’s operating cashflow is not enough to cover dividend payments and capital expenditures.  The company will constantly need to issue more stock or debt to make up the difference.  However, the company is speculatively priced at 21.9 times average adjusted earnings.  I would wait for the price to drop below $30 before investing in Progress Energy.  A $30 share price is much closer to 12 times average earnings and it $34.59 book value.  I don’t like the company’s lack of equity growth.  Nor do I like its meager current and quick ratios.  Progress doesn’t have much cash for upcoming liabilities this year.  The bottom line is that you should wait for the Duke Energy merger and for the return of the worldwide recession to take this stock back down to where it was in 2009.  This one has had a big stock price run since then and its headed for a fall because the earnings don’t justify higher stock prices.

DISCLOSURE – I don’t own Progress Energy (PGN).

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A First Look at Southern Co. (SO).

Today I take a first look at a very large utility company in southeastern parts of the USA.  Southern Co. is the third company out of 15 that I looking at from a Seeking Alpha article that I read last week.  Most of the stocks in that article were 4-5% dividend yielders.  I’m trying to figure out which ones are potential buys at much lower prices when the worldwide recession returns with a vengeance.

Southern Company (SO)

Share price: $44.44

Shares: 861.63 million

Market capitalization: $38.3 billion

Bonds outstanding: $3.2 billion.  I don’t know why the $1.375 billion due in 2012 is not shown on the graphic below.  This company has a lot of debt.

What the company does - Southern generates and distributes electricity to more than 4.4 million customers in the Southeast. It owns four electric utilities--in Alabama, Georgia, Florida, and Mississippi--and has more than 42,000 megawatts of generating capacity, the majority of which comes from coal-fired plants. Southern also operates a conservative merchant generation segment, Southern Power. Southern is one of the most widely held stocks in the United States.

Morningstar’s take - We think this well-positioned juggernaut from the Deep South could be an attractive investment for those seeking dividends and capital preservation in volatile markets. Enviable regulatory relationships and rate structures, along with a commitment to the pure-play regulated utility model, make Southern one of our favorite utilities and its dividend one of the best bets in the business. Despite slower usage growth, we think Southern can still achieve consistent dividend growth of 5% through 2015.

DIVIDEND RECORD – Southern Company is a consistent dividend payer typical of most mature utilities companies.

Dividend: $0.4725 quarterly

Dividend yield: 4.25% ($1.89 annual dividend/$44.44 share price)

Dividend payout ratio: 74.1% using Google Finance’s most recent EPS of $2.55 or 88.7% using the average adjusted earning power of $2.13 per share.

[My 5 year dividend chart from Google Finance isn’t working right now]

EARNING POWER – $2.13 six year average adjusted EPS @ 861.63 million shares

(Earnings adjusted for changes in capitalization)

	EPS	Net income	Shares	Adjusted EPS
2006	$2.10	$1,573 M	748 M	$1.83
2007	$2.28	$1,743 M	761 M	$2.01
2008	$2.25	$1,742 M	775 M	$2.02
2009	$2.06	$1,643 M	796 M	$1.91
2010	$2.36	$1,975 M	837 M	$2.29
2011 (est)	$2.74	$2,364.19 M	861.63 M	$2.74

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.49	$422 M	854 M	$0.49
2011 Q2	$0.70	$604 M	862 M	$0.70
2011 Q3	$1.06	$916 M	868 M	$1.06
2011 Q4 (est)	$0.49	$422.19 M	861.63 M	$0.49
2011 total (est)	$2.74	$2,364.19 M	861.63 M	$2.74

Six year average adjusted earnings per share is $2.13

Consider contrarian buying below $17.04 (8 times average adjusted EPS)

Consider value buying below $25.26 (12 times average adjusted EPS)

Consider speculative selling above $42.60 (20 times average adjusted EPS)

Southern Company is currently trading at 20.86 times average adjusted EPS.  This is stock is speculatively priced.

BALANCE SHEET – [summary of company balance sheet]

Book value per share: $20.46

Price to book value ratio: 2.17 (under 1.0 is good)

Current ratio: 1.15 latest quarter (over 2.0 is good)

Quick ratio: 0.67 latest quarter (over 1.0 is good)

Debt to equity ratio: 1.06 (lower is better).  This is pretty high.

CONCLUSION – Southern Co. (SO) is not a high dividend stock at its current price of $44.44.  It would become a high dividend stock if its stock price dropped to below $31.50 (meaning it would begin yielding above 6%).  The company is a dedicated dividend payer that currently has a dividend payout ratio of 88.7% using average adjusted earnings.  Southern Co. is speculatively priced at 20.86 times is six year average adjusted earnings of $2.13.  It has a lot of debt compared to equity and you would be paying over twice the book value per share to buy it at its current price.  I recommend that you don’t consider buying Southern Co. until its price drops below $25.56.  You would enjoy a much larger dividend yield and you would have much be odds of price appreciation at that price.

DISCLOSURE – I don’t own Southern Company (SO).

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Your Retirement Money and Trading Money Is Not Safe

Your retirement and trading (brokerage) money is not safe.  Register your stocks in your own name.  This means you need to get them out of “street name” registration from your broker.

The real scary aspects of the MF Global bankruptcy are becoming known to a wider group of people.  Some people are smelling the first wiff of smoke in the theater and are tiptoeing to the exits.  Don’t get trampled when the masses of individual investors see the flames and stampede in the rush to get out with some of their retirement money.

http://teapartyeconomist.com/2012/01/31/your-money-is-not-safe/

http://www.zerohedge.com/contributed/mf-global-customer-funds-were-not-vaporized-stanley-haar-takes-wsj-task

Even the congressional budget office (CBO) sees lower Keynesian growth rates coming.  This means a double-dip recession.

http://www.zerohedge.com/contributed/cbo-report-omg

There will be opportunities to buy high dividend stocks at value prices during the lows of the upcoming recession.

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A First Look at PG&E (PCG).

This is my second article on a list of 15 stocks recommended in a Seeking Alpha article from last week.  Most of the stocks on the list have a current dividend yield between 4% and 5%.  Therefore, at some lower price they will meet my 6% high dividend stock yield.  So, I’m taking this opportunity to take a first look at each of them to screen them for the future.  Today’s stock is utilities company Pacific Gas & Electric (aka PG&E).

PG&E (PCG)

Share price: $40.85

Shares: 405.88 million

Market capitalization: $16.58 billion

Bonds outstanding: $394.5 million; nothing big is due anytime soon.

What the company does - PG&E is a holding company whose main subsidiary is Pacific Gas and Electric, a regulated utility operating in Central and Northern California that serves 5.1 million electric customers and 4.3 million gas customers in 47 of the state's 58 counties. The fully regulated utility owns 118 power plants in California that provide about 40% of the utility's power needs. In 2004, PG&E sold its unregulated assets as part of its post-bankruptcy reorganization.

Morningstar’s take - Since PG&E emerged from bankruptcy in 2004, it has posted among the best earnings growth of any regulated utility in the United States. Constructive California regulation following the 2000-01 state energy crisis has led to generous rates and huge investment opportunities for the state's investor-owned utilities, including PG&E, Edison International EIX, and Sempra Energy SRE. But in the short run, inflation threats, costs from the September 2010 San Bruno gas pipeline explosion and regulatory pushback could have an outsize effect on PG&E.

DIVIDEND RECORD – PG&E has been paying dividends since 2005 (it emerged from bankruptcy in 2004).  It has been growing its dividend steadily.  In 2007 the quarterly dividend was $0.36; now it is $0.46.  That is an increase of 27% over five years.

Dividend: $0.46 quarterly

Dividend yield: 4.4% ($1.80 annual dividend / $40.85 share price)

Dividend payout ratio: 72% based on Google Finance EPS of $2.51 per share or 65% based on the six year average adjusted EPS of $2.75 per share

[My standard 5 year dividend chart from Google Finance isn’t working – sorry!]

EARNING POWER – $2.75 six year average adjusted earnings per share @ 405.88 million shares

(Earnings adjusted for changes in capitalization)

	EPS	Net income	Shares	Adjusted EPS
2006	$2.76	$991 M	346 M	$2.44
2007	$2.78	$1,006 M	353 M	$2.48
2008	$3.63	$1,338 M	358 M	$3.30
2009	$3.20	$1,220 M	386 M	$3.01
2010	$2.82	$1,099 M	392 M	$2.71
2011 (est)	$2.57	$1,028.88 M	405.88 M	$2.53

	EPS	Net income	Shares	Adjusted EPS
2011 Q1	$0.50	$199 M	397 M	$0.49
2011 Q2	$0.91	$362 M	400 M	$0.89
2011 Q3	$0.50	$200 M	404 M	$0.49
2011 Q4 (est)	$0.66	$267.88 M	405.88 M	$0.66
2011 total (est)	$2.57	$1,028.88 M	405.88 M	$2.53

Six year average adjusted earnings per share is $2.75

Consider contrarian buying below $22.00 (8 times average adjusted EPS)

Consider value buying below $33.00 (12 times average adjusted EPS)

PG&E is currently trading at 14.85 times average adjusted EPS.  This is priced for investment.

Consider speculative selling above $55.00 (20 times average adjusted EPS)

BALANCE SHEET – Weak balance sheet despite the bankruptcy in 2004.  Look at all that red (liabilities).  I don’t like the really low quick ratio (cash assets/current liabilities).  It isn’t even close to 1.0.

Book value per share: $29.46

Price to book value ratio: 1.39 (under 1.0 is good)

Current ratio: 0.86 latest quarter (over 2.0 is good)

Quick ratio: 0.32 latest quarter (over 1.0 is good)

Debt to equity ratio: 0.97 (lower is better)

CONCLUSION – PG&E appears to be a dedicated dividend payer and slight dividend grower since it emerged from bankruptcy in 2004.  It pays a decent dividend of 4.4% yield; however, I wouldn’t buy it until the price drops below $30.00.  PG&E would be a high dividend stock yielding 6% at the current dividend at a price of $30.00.  It would also be a value stock below $33.00 based upon its average adjusted earning power of $2.75 per share.  Price to book value ratio would also improve to 1.0 under those circumstances.  You can see on the chart below that PG&E was a buy during the March 2009 lows.  Wait for the stock to retreat back to that level to get a better dividend yield and better opportunity of price appreciation.

DISCLOSURE – I don’t own PG&E (PCG).

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