New Mountain Finance Corp.: A 13% Yielder That Insiders Love
1 High-Yield Stock to Think About
It’s no secret that in today’s market, most high-yield stocks are not perfect. Because of the low-interest-rate environment and the massive economic downturn, anything that pays a safe, meaningful dividend is highly sought after. As a result, investors have already bid up the prices of the most reliable dividend stocks, causing their yields to drop.
And that also means if a stock’s yield stays at an extremely elevated level, there is usually some concern keeping investors on the sidelines. The most common concern is dividend safety. Since the COVID-19 pandemic started disrupting the economy, we’ve seen dividend cuts from virtually every industry.
It doesn’t help the case that some regions are in a second wave of the coronavirus, so there’s still plenty of uncertainty going forward. At a lot of companies, management has pulled their guidance.
Despite all that, there is a very good reason why we should check out an ultra-high-yielder that goes by the name of New Mountain Finance Corp. (NASDAQ:NMFC) right now: insider ownership.
You see, we live in an era where earnings can be adjusted and management always seems to be upbeat about their respective company’s business.
But talk is cheap. If management is willing to put their money where their mouth is, it should be considered as a more genuine vote of confidence.
In the case of New Mountain Finance Corp., management and employees are the biggest shareholders of the company, with a combined ownership stake of approximately 13%. (Source: “Q2 2020 Earnings Presentation,” New Mountain Finance Corp., last accessed September 24, 2020.)
And as I said, NMFC is an ultra-high-yielding stock. At the time of this writing, the company has a quarterly dividend rate of $0.30 per share and a share price of $9.24. Simple math shows that New Mountain stock is offering an annual dividend yield of 13%.
Now, you are probably wondering how this company is able to provide such a staggeringly high yield.
Well, New Mountain Finance Corp. is a business development company (BDC) that provides financing solutions to middle market businesses. In particular, it targets “defensive growth” companies, which tend to exhibit characteristics like acyclicality, recurring revenue, and niche market dominance.
New Mountain Finance Corp. defines the middle market as businesses with annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of between $20.0 million and $200.0 million. Because this is an underserved market segment, NMFC can generate oversized interest income by lending to these companies.
As of June 30, 2020, New Mountain Finance Corp. had investments in 108 different companies, with the yield at cost of the portfolio standing at 8.8%.
According to the latest earnings report, NMFC generated adjusted net investment income of $0.30 per share in the second quarter of 2020. Considering that the company paid a cash dividend of $0.30 per share for the quarter, its adjusted profit covered the payout, but did not leave any room for error. (Source: “New Mountain Finance Corporation Announces Financial Results For The Quarter Ended June 30, 2020,” New Mountain Finance Corp., August 5, 2020.)
When it comes to the impact from COVID-19, note that, during the second quarter, only one new portfolio company was placed on non-accrual status (meaning it was not generating the stated interest payments), and it was a company management had already discussed in the previous earnings call.
In total, five of NMFC’s 108 portfolio companies were on non-accrual status at the end of June, representing approximately 2.5% of the portfolio’s fair value. Management does not expect any additional portfolio companies to go on non-accrual in the third quarter.
As for future dividend coverage, the BDC’s chief executive officer, Rob Hamwee, said, “We’re confident absent a dramatic change in market conditions and our ability to generate approximately $0.30 of NII per quarter going forward to support the dividend.” (Source: “New Mountain Finance Corporation’s (NMFC) CEO Rob Hamwee on Q2 2020 Results – Earnings Call Transcript,” Seeking Alpha, August 6, 2020.)
Bottom Line on New Mountain Finance Corp.
As a risk-averse income investor, I prefer companies with stronger dividend coverage for a wider margin of safety. But for yield hunters, New Mountain stock’s insider-approved 13% yield certainly deserves a look.