Fidus Investment Corp: A High-Yield Stock to Think About
Remember a few months ago when it was hard to find high-yield stocks?
Well, with the market downturn, the drop in dividend-paying companies’ share prices has lifted their yields up—in some cases, way up.
Case in point: Fidus Investment Corp (NASDAQ:FDUS) is a business development company (BDC) headquartered in Evanston, Illinois. For those not in the know, BDCs are pass-through entities; as long as they return most of their profits to investors in the form of dividends, they pay little to no income tax at the corporate level.
Like many of its peers, Fidus Investment Corp was already a high-yield stock to begin with. For quite a few years, the company has been paying quarterly cash dividends of $0.39 per share. It even rewarded investors with special dividends from time to time. (Source: “Dividend History,” Fidus Investment Corp, last accessed June 15, 2020.)
Then, due to the coronavirus outbreak, management announced on April 30 that they would reduce the quarterly dividend to $0.30 per share.
No one likes dividend cuts. However, keep in mind that we live in an unprecedented environment and some companies have suspended their dividend payments altogether.
Also, because FDUS stock is trading at a lower price than before the pandemic, its yield still looks very, very impressive. At the time of this writing, this BDC offers an annual dividend yield of 13.5%.
A Closer Look at Fidus Investment Corp’s Financials
Now, you are probably wondering whether Fidus Investment can afford its current dividend policy.
Well, like many BDCs, Fidus Investment Corp is in the financing business. In particular, the company provides customized debt and equity financing solutions to lower-middle-market companies in the U.S., which tend to generate annual revenues between $10.0 and $150.0 million.
As of March 31, Fidus Investment had a $718.9-million portfolio diversified across 66 companies. On a cost basis, the portfolio consisted of 19% first-lien debt, 55% second-lien debt, 19% subordinated debt, and seven percent equity-related securities. (Source: “Investor Presentation – May 2020,” Fidus Investment Corp, last accessed June 15, 2020.)
Those debt investments provide Fidus with substantial interest income. The weighted average yield on the company’s debt investments stood at 12% at the end of March.
By earning oversized interest income, this BDC can dish out oversized dividends.
In 2019, Fidus Investment generated adjusted net investment income of $1.44 per share. During the year, the company paid fourth-quarter dividends and a special dividend totaling $1.60 per share. (Source: “Fidus Investment Corporation Announces Fourth Quarter and Full Year 2019 Financial Results,” Fidus Investment Corp, February 27, 2020.)
While FDUS’s adjusted net investment income was lower than its payout, the company also reported a net increase in net assets, which totaled $1.98 per share in 2019, well above its dividend payout.
Of course, past performance does not guarantee future results, especially in a time when some businesses remain closed due to the COVID-19 outbreak.
In the first quarter of this year, Fidus Investment’s adjusted net investment income came in at $0.35 per share. This time, it experienced a net decrease in net assets. The company’s dividend payment, on the other hand, was $0.39 per share for the quarter. (Source: “Fidus Investment Corporation Announces First Quarter 2020 Financial Results,” Fidus Investment Corp, April 30, 2020.)
One of the main concerns for BDCs right now is liquidity.
On that front, Fidus Investment Corp provided an update in its latest earnings release. At the end of March, the company had $27.2 million in cash and cash equivalents and $65.0 million of unused capacity under its senior secured revolving credit facility.
It should also be noted that Fidus had spillover income—also called taxable income in excess of distributions—of $21.6 million, or $0.89 per share, at the end of March. This could provide the company with some financial wiggle room going forward.
When asked about why Fidus reduced its dividend, given this level of spillover income in the earnings conference call, the company’s chairman and chief executive officer, Ed Ross, said, “We feel like it’s in the best long-term interest of our shareholders to operate with an abundance of caution, including with regard to our dividend distribution policy. And operating with a conservative mindset is how we have always operated this company.” (Source: “Fidus Investment (FDUS) CEO Ed Ross on Q1 2020 Results – Earnings Call Transcript,” Seeking Alpha, May 1, 2020.)
At the end of the day, I wouldn’t call this beaten-down high-yielder a slam dunk. But for yield hunters, FDUS stock still deserves a look.