Income Investors Could Earn a 9.6% Dividend Yield
Fidus Investment Corp. (NASDAQ:FDUS) stock provides debt and equity financing solutions to small- and medium-sized businesses (SMBs) with the goal of generating both incomes from the debt investments and capital appreciation from equities. When an investment is made on the debt side of the portfolio, it is done through a loan or fixed income note, while equity investments are performed through preferred shares, a direct ownership stake, or via a partnership.
Now that you understand Fidus’ background, let’s take a look at the three reasons why the company is a potentially strong investment opportunity.
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FDUS stock has been traded publicly since 2011, always paying a quarterly dividend. Back at the time of the initial public offering, the dividend was $0.32 per share; today, it is $0.39, or an increase of 21%. Based on the current trading price of $16.18, the dividend yield is 9.6%, uniquely displaying both a high yield and dividend growth.
Making FDUS stock even more unique is its annual tradition of paying out additional cash in the form of a special dividend. This occurs when the company has money to spare following the dividend and the traditional costs of operation. Needless to say, this is a very shareholder-friendly company.
Signs point to both the dividend per share continuing and future special dividends. The first reason is that for every dollar of earnings, $0.80 is given to investors and the rest is retained inside the business. This makes both rewarding investors and growing cash flow further possible. The second reason is the expected growth in annual earnings. In 2016, earnings per share were reported as $1.45, which is forecasted to climb to $1.56 in 2019. (Source: “Fidus Investment Corporation Earnings Forecast,” NASDAQ, last accessed October 2, 2017.)
Dirt Cheap Valuation
Comparing the price-to-earnings (P/E) ratio to the industry average, FDUS stock is trading at a very attractive valuation. The current P/E ratio for FDUS stock is 8.3 times, while the industry average is 27.2 times. That means Fidus only has a third of the valuation compared to its peers–a valid reason to purchase shares, indeed.
FDUS stock is being compared to its peers because they all share exterior influences that will impact their gross and net income in the same manner. This would include the likes of the performance of the economy, the direction of interest rates, and changes in government regulations.
Strong Financial Position
Financial statements are very important because they indicate if the business can keep running. Also, the stronger the balance sheet, the greater the opportunities to reward shareholders.
The company’s financials indicate that there is the possibility of seeing a greater dividend, along with the stock price trading higher. This should come to be reflected in a higher P/E ratio. The first piece of evidence of this bullish outlook is Fidus’ large cash balance, with approximately 14% of the company’s market value sitting in cash. (Source: “Fidus Investment Corp.,” MarketWatch, last accessed October 2, 2017.)
The large position also reflects positively on management and shows the markets that they are strict with the business’ finances. Consider not only the company’s large cash balance, but that the cash position is increasing, nearly doubling since 2014. Also, the cash balance rising represents strong internal control over all areas of the business in terms of cost.
More evidence of a strong financial position can be found in the reduction of debt compared to the overall equity position over the past five years. Even though there is debt on the balance sheet, it is being used strategically to grow the business more rapidly than compared to when using no debt. The total amount of assets has grown by over 70% over the past five years, and with the current debt position, there is no over-leverage of the balance sheet, which is the most important thing to consider.
Final Thoughts About FDUS Stock
And there you are three reasons to be bullish on FDUS stock. This should help with making a more informed decision before deploying any capital into the company.
Fidus’ current strong financial position should lead to the stock price trading higher, at least until the investment becomes more popular with investors. But in the meantime, you can potentially enjoy FDUS stock trading at a very cheap discount to its peers and with a high yield of 9.6%.