10 Large Caps to Rule Them All
Oct 12th 2011 8:17PM
Updated Oct 12th 2011 8:20PM
After sifting through countless small caps and mid-cap stocks to rule them all over the past 20-plus weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
For reference, here are the previous nine choices:
- Teva Pharmaceutical
- Silver Wheaton
- Bank of America
For the final choice and the end to this series, I decided it was best to include a perceived low-beta, high-yielding company to hedge against the multiple growth stocks included in this list. Therefore, my last choice is Annaly Capital Management (NYS: NLY) .
What it does
Annaly Capital Management owns and manages a portfolio of mortgage-backed securities. Before you freak out and throw your laptop out the window, relax. Annaly doesn't deal with the commercial and residential side of the MBS business. Rather, Annaly invests in loans backed by the United States government, further reducing -- though not eliminating -- the company's risk. As of last quarter, 89% of the company's assets under management were tied to fixed-rate MBSes, with the remaining 11% predominantly adjustable-rate MBS.
How it stacks up
As a real estate investment trust, Annaly is required to return 90% or more of its earnings to shareholders in the form of a dividend. Although we probably wish more companies ran like this, it's lucrative only if it can maintain profitability. Luckily for shareholders, Annaly has reported a full-year loss only once in the past decade.
Aiding the company's profit projections is recent guidance out of the Federal Reserve that pledged to keep the Fed funds rate around 0.25% through mid-2013. This is great news for Annaly, which makes its profits off the difference between the short-term rate at which it borrows and the long-term rate at which it lends. I could try to explain this better, but fellow Fool Ilan Moscovitz did such a fantastic job of breaking down Annaly that I encourage you to see what he said to further explore how it manages its risk across a myriad of interest-rate scenarios.
The only concern I have with Annaly's investment style is its leverage. To generate capital and take advantage of what it deems a solid investment opportunity, the company will issue shares on the open market. Not only can this have a dilutive effect to shareholders, but it also pumps up the potential risk by increasing the company's leverage to MBS. Up until recently this hasn't been an issue, with the Fed funds rate at historic lows, but if rates rise down the road, Annaly will have to change its strategy swiftly.
Still, Annaly looks like a solid option among its peers.
Return on Equity (TTM)
|Annaly Capital Management||17.30%||15.70%|
|Hatteras Finanacial (NYS: HTS)||15.10%||16.10%|
|American Capital Agency (NAS: AGNC)||18.30%||20.60%|
|Chimera Investment (NYS: CIM)||17.80%||20.60%|
|Capstead Mortgage (NYS: CMO)||12.30%||14.60%|
|Redwood Trust (NYS: RWT)||6.20%||9.10%|
Source: Morningstar, as of close 10/11/2011.
Although you might be tempted, resist the urge to fall in love with those 20% yields. Relative to its peers, Annaly's investment portfolio can easily be described as conservative.
How it could make you money
Just in case you failed to notice, Annaly Capital is yielding 15.7%. Understandably, it would be foolish (with a small 'f') to assume that the company will be able to produce a 15%-plus yield forever, because that's probably not possible. When lending rates begin to march higher, Annaly will feel a pinch on its margins.
Still, and from a historical perspective, Annaly is going to net you a yield that would make even your most consistent dividend-paying stocks drop to their knees and beg for forgiveness. With lending rates at their highs in 2005, Annaly was still yielding north of 3% and has averaged a greater than 11% yield since 1998. Just factoring in the yield alone, you'd get a 100% payback on your investment in less than seven years.
Also keep in mind that the company's huge dividend also creates a herd effect, which helps to prop up the stock price. In times of heavy volatility as we're in now, investors will often flock to safe havens like Annaly and buy into the stock regardless of price to be part of its phenomenal dividend. This herd mentality will often support a stock even as the market tanks around it. It's no surprise to me that over the past decade, including split-adjusted returns, Annaly Capital is up 256%.
Annaly has a well-diversified portfolio, a high dividend yield, and good immediate business prospects with a long history of profitability, making it a great final choice for the "10 Large Caps to Rule Them All" series.
But don't stop there. Just because this series is over, that doesn't mean there aren't other great companies yet to be uncovered. Get your free copy of the "13 High-Yielding Stocks to Buy Today" and start controlling your own financial destiny.
At the time this article was published The Motley Fool owns shares of Teva Pharmaceutical, Apple, Starbucks, FedEx, Chimera Investment, Annaly Capital Management, and Bank of America. Motley Fool newsletter services have recommended buying shares of Apple, Amazon.com, Teva Pharmaceutical, WellPoint, FedEx, Starbucks, and Chevron, as well as creating a bull call spread in Apple.Fool contributor Sean Williams owns shares of Bank of America but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's backed by transparency.
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