CM Finance Inc: Can You Count on This 14% Yield?
A High-Yield Stock Most People Have Never Heard Of?
Wouldn’t it be nice to lock in a yield of 14%?
It certainly would, especially if you are looking to live off the dividends from an income portfolio.
The average dividend yield of all S&P 500 companies is two percent at the moment. That means that if you want to earn a dividend income of $10,000 a year, you would need an S&P 500 portfolio of $500,000. (Source: “S&P 500 Dividend Yield,” Multpl.com, last accessed January 17, 2019.)
That’s quite a large sum of money, especially considering the fact that the median American household has just $11,700 saved. (Source: “Brace yourself: This is how much America’s 1% has saved,” MarketWatch, September 5, 2018.)
Here’s how high-yield stocks could come to the rescue. If a company pays, say, 14%, you would only need to put up $71,429 to earn $10,000 in annual dividends.
Of course, we know that double-digit yielders are not exactly the safest bets. As a conservative income investor, I’d rather have a diversified S&P 500 portfolio than put all my money in an ultra-high-yielding stock.
Still, because of their generosity, ultra-high-dividend stocks could serve as yield-boosters in a well-diversified portfolio.
And that’s why I’m looking at CM Finance Inc (NASDAQ:CMFN) today.
CM Finance Inc: A Middle-Market Lender
CM Finance is a business development company (BDC) headquartered in New York City. Like most BDCs, the company provides financing solutions to middle-market businesses.
While CM Finance makes both debt and equity investments, its primary focus has been senior secured lending. As of September 30, 2018, 61.5% of the company’s portfolio consisted of first-lien loans, while another 34.7% of the portfolio consisted of second-lien loans. (Source: “CORRECTING and REPLACING – CM Finance Inc Reports Results for its Fiscal First Quarter Ended September 30, 2018,” CM Finance Inc, November 8, 2018.)
The business is quite profitable, as the company’s weighted average yield on debt investments stood at 10.9% at the end of September 2018.
And if you are concerned about the risk associated with the lending business, keep in mind that CM Finance does not lend to startups. A typical borrower of the company has annual revenues of at least $50.0 million and annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of at least $15.0 million. Each investment usually ranges from $5.0 million to $25.0 million.
At the end of September, CM Finance’s portfolio is diversified across 30 portfolio companies, and no investment was on non-accrual status, meaning all of them were generating their stated interest rates.
By earning oversized interest income from its lending portfolio, CM Finance can return cash to investors regularly.
In fact, because CM Finance is a BDC, it is regulated under the Investment Company Act of 1940. That means it is required by law to return most of its profits to shareholders in the form of dividends.
CM Finance currently pays quarterly dividends of $0.25 per share, giving CMFN stock an annual yield of 14.1%.
Is the Dividend Safe?
Of course, as I mentioned earlier, there are usually risks associated with this kind of ultra-high yield.
The usual suspect is dividend safety. If a company cannot make enough money to cover its payout, it will likely have to cut its dividend at some point.
And as we have seen in the past, for income investors, few things are worse than a dividend cut.
So, should this be a concern for CMFN stock investors?
Well, according to the latest earnings report, CM Finance generated $3.409 million in net investment income in the September quarter, which represented a 13% increase year-over-year.
However, the amount was just shy of its dividends payable, which totaled $3.413 million for the quarter.
Does that mean we should cross CMFN stock off our watchlists?
Not necessarily. You see, the slight shortfall in dividend coverage in the September quarter was mostly due to the expenses associated with the company issuing a new baby bond. Looking a bit further back, you’ll see that in the March and June quarters of 2018, CM Finance did outearn its dividend.
Furthermore, management is committed to returning cash to investors through dividends.
“We believe our dividend level is consistent with our ability to generate NII without reducing our investment quality or changing our focus from secured lending opportunities, and further believe our quarterly dividend is both sustainable and attractive to our shareholders,” said Michael Mauer, CM Finance’s Chairman and Chief Executive Officer. (Source: “CM Finance, Inc. (CMFN) CEO Michael Mauer on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, November 8, 2018.)
At the same time, management expects the company’s net investment income to fully cover its dividend in the December quarter.
The Bottom Line on CM Finance Corp
CMFN stock isn’t perfect. I’d like to see the company cover its payout on a consistent basis before taking out my wallet.
Still, with a secured lending focus and a jaw-dropping yield of 14.1%, CM Finance Inc could be a solid yield-booster someday.