A Safe Double-Digit Dividend Yield?
In this day and age, a dividend yield north of 10% often seems too good to be true. But every once in a while, you come across an ultra-high yielder that can actually back its payout.
CM Finance Inc (NASDAQ:CMFN) stock is a good example of this. CM Finance is in the lending business. Headquartered in New York City, the company provides financing solutions to middle-market businesses in the U.S. By collecting interest payments from its loan portfolio, CM Finance can pay regular dividends to its shareholders.
Right now, the company has a quarterly dividend rate of $0.25 per share, which comes out to a staggering annual yield of 11.5%. As I mentioned earlier, this kind of yield is often hard to believe. But for those worried about CM Finance Inc’s dividend safety, a look at its financials should be reassuring.
The company follows a fiscal year that ends on June 30. In the fourth quarter of its fiscal 2018, CM Finance earned a net investment income of $8.5 million, or $0.62 per share. The amount covered the company’s quarterly dividend payment of $0.25 per share more than twice over. (Source: “CM Finance Inc Reports Results for its Fiscal Fourth Quarter ended June 30, 2018,” CM Finance Inc, September 4, 2018.)
In full-year fiscal 2018, CM Finance’s net investment income totaled $1.38 per share. Its dividends, on the other hand, totaled $1.00 per share. So again, the company had no problem meeting its distribution obligations.
CM Finance Inc: A Rock-Solid Business
The reason for CMFN stock’s outsized payout is simple: the company earns outsized interest payments from its portfolio. As of June 30, 2018, the weighted average yield on CM Finance’s debt investments at cost stood at 11.19%.
Obviously, high-yield debt can be risky, but note that the company does not really lend to startups. Since its inception in 2013, CM Finance has been focusing on serving middle-market companies that have annual revenues of at least $50.0 million and earnings before interest, tax, depreciation, and amortization (EBITDA) of at least $15.0 million.
It helps that CM Finance specializes in senior secured lending. By the end of June, first-lien loans accounted for 52.1% of the company’s portfolio, while second-lien loans accounted for another 43.3%. In other words, unsecured debt investments, unitranche loans, and equity, warrants, and other positions only represented 4.6% of CM Finance Inc’s portfolio.
The beauty of senior secured loans is that they give lenders a better chance of getting their money back if things go south. For instance, if you are a first-lien lender, you would stand first in line to get paid in the event of a borrower liquidation.
Furthermore, CM Finance’s portfolio is well diversified. The company currently has investments across 14 different industries. Its largest industry exposure—Professional Services—represents just 14.0% of its portfolio and is diversified across four separate investments. (Source: “CM Finance Inc,” CM Finance Inc, last accessed October 10, 2018.)
The Bottom Line on CMFN Stock
At the end of the day, keep in mind that CM Finance is also well positioned for the rising interest rate environment. In the company’s annual 10-K filing to the Securities and Exchange Commission (SEC), management revealed that, as of June 30, 2018, 95.8% of the company’s debt investments bore interest at floating rates. (Source: “Form 10-K,” United States Securities and Exchange Commission, last accessed October 10, 2018.)
Interest rates are already on the rise and, with more rate hikes to come, the company could earn higher interest income. Adding that to an already safe 11.5% yield, CMFN stock Inc could be an opportunity for income investors.