Does This Little-Known Dividend Stock Yield 13%?
How Much Does NEWT Stock Actually Pay?
Most people have no idea what Newtek Business Services Corp (NASDAQ:NEWT) is. But for yield-seeking investors, the company could be one of the best opportunities on the market.
One of the first questions that yield-hunters like to ask is, “How much can I get paid if I buy the stock today?” Well, at first glance, Newtek stock seems to be paying a lot.
On October 10, Newtek’s board of directors declared a fourth-quarter cash dividend of $0.71 per share. The amount represented a whopping 42% increase from what it paid in the fourth quarter of 2018. The new dividend will be paid on December 30 to shareholders of record as of December 16. (Source: “Newtek Business Services Corp. Declares Fourth Quarter 2019 Dividend of $0.71 per Share,” Newtek Business Services Corp, October 10, 2019.)
If you use simple math, you’ll see that the latest quarterly dividend rate translates to an annualized payout of $2.84 per share. With NEWT stock trading at $21.76 per share, that’s an annual yield 13%!
While that simple extrapolation is usually how investors calculate a company’s annual dividend yield, it may not be the best method to use in the case of Newtek stock.
You see, after most companies make a change to their dividend policy, they tend to follow the new dividend rate for a while—until they make another change. But at Newtek Business Services, the dividend can vary from quarter to quarter.
In particular, the company said that its board “expects to maintain a dividend policy with the objective of making quarterly distributions in an amount that approximates 90 – 100% of the Company’s annual taxable income,” and that the “Amount and timing of dividends, if any, remain subject to the discretion of the Company’s Board of Directors.” (Source: Ibid.)
For instance, in 2017, Newtek’s first-, second-, third-, and fourth-quarter dividends were $0.36, $0.40, $0.44, and $0.44 per share, respectively. In 2018, the four quarterly dividends were $0.40, $0.42, $0.48, and $0.50. (Source: “Dividend and Split History,” Newtek Business Services Corp, last accessed October 16, 2019.)
That is, the company’s payout in the first quarter of 2018 was lower than in the fourth quarter of 2017. But the sequential decline shouldn’t really bother investors because Newtek’s total payout in 2018 was $1.80 per share, substantially higher than the $1.64 per share paid in 2017.
And it’s a similar story this year.
Newtek started 2019 with a first-quarter dividend of $0.40 per share, an amount that’s less than what it paid in the fourth quarter of 2018. However, the company’s payout grew to $0.46 per share in the second quarter and to $0.58 in the third quarter.
Add in the newly declared $0.71 fourth-quarter dividend and Newtek is on track to pay $2.15 per share in full-year 2019, which would be 19.4% higher than the $1.80 per share paid in 2018.
That’s why, in my opinion, a more appropriate way to calculate NEWT stock’s yield is to look at the annual payout, not the quarterly dividends. If the company can maintain its 2019 annual payout of $2.15 per share, it would be offering an annual dividend yield of about 10% at the current stock price.
In today’s market, a 10% yield is still very, very attractive. The big question now, of course, is whether the company can afford its generous dividend policy.
Is the Dividend Safe at Newtek Business Services Corp?
Newtek is a business development company (BDC) that offers complete lending solutions.
But other than being a lender, which is what most BDCs are, Newtek provides a wide range of business services, such as payroll and benefit processing, Web design, e-commerce, electronic payment processing, and complete IT solutions.
Over the years, Newtek, along with its portfolio companies, have served over 100,000 business accounts.
Business has been going quite well at Newtek. In the second quarter of 2019, the company earned an adjusted net income of $0.57 per share, which not only represented a sizable 29.5% increase year-over-year, but also easily covered its second-quarter cash dividend of $0.46 per share. (Source: “Newtek Business Services Corp. Reports Second Quarter 2019 Financial Results,” Newtek Business Services Corp, August 6, 2019.)
In the first six months of 2019, Newtek’s adjusted net investment income improved 14.8% from a year ago to $1.01 per share. Again, this was more than enough to cover its first- and second-quarter dividends totaling $0.86 per share.
Of course, the bulk of NEWT stock’s 2019 dividends are being paid in the third and fourth quarters of the year.
But that’s in line with the seasonality of the company’s earnings. Historically, Newtek’s adjusted net investment income tends to be stronger in the second half of each year. (Source: “Second Quarter 2019 Financial Results Conference Call,” Newtek Business Services Corp, August 7, 2019.)
As it stands, NEWT stock could be an income opportunity.