New Mountain Finance Corp.: Insiders Have Loaded Up on This 9.9% Yielder
This High-Yield Stock Could Be Special
As income investors, we all want to earn a high yield. But the blunt reality is, in today’s market environment, most high-yield stocks aren’t the safest bets. And if the yield approaches double-digits, the margin of safety would be even thinner.
It doesn’t help that, at every company, management almost always expresses optimism about their business. And with earnings being adjusted, it’s hard for retail investors to tell whether a high-yield stock is really worth owning.
On that front, a good sign of strength is insider ownership. Talk is cheap, but if management is willing to put their money where their mouth is, it could represent a more genuine vote of confidence.
And that’s why I want to talk to you about New Mountain Finance Corp. (NASDAQ:NMFC).
New Mountain Finance is a business development company (BDC) that provides financing solutions to middle-market businesses. Its investment objective is to generate current income and capital appreciation through investments in debt securities at all levels of the capital structure. Occasionally, the investments also include an equity component.
In the current market environment, the No. 1 thing that makes NMFC stock stand out is the sheer size of its payout. New Mountain Finance Corp. has a quarterly dividend rate of $0.30 per share. With New Mountain stock trading around $12.15 per share at the time of this writing, that quarterly rate translates to an annual yield of 9.9%.
Here’s where things get more interesting: while high-yield stocks aren’t the safest bets, NMFC stock could be worth a look because the company’s management are the largest shareholders.
At a conference call in February, New Mountain Finance Corp.’s chairman and CEO, Steven Klinsky, said, “I and other members of New Mountain continue to be the largest shareholder of the company with ownership of approximately 12%. Insiders have added approximately one million shares to our holdings since the onset of the crisis.” (Source: “New Mountain Finance (NMFC) CEO Robert Hamwee on Q4 2020 Results – Earnings Call Transcript,” Seeking Alpha, February 25, 2021.)
The BDC’s financials are not bad, either. Middle-market lenders in general were not in the best of shape last year because some borrowers had trouble making their payments—not exactly a surprise, given the economic impact of the COVID-19 pandemic. However, New Mountain Finance’s business seems to have bounced back. Every borrower paid their interest for the fourth quarter of 2020 and no new borrowers were placed on non-accrual in the quarter. (Source: “Q4 2020 Earnings Presentation,” New Mountain Finance Corp., last accessed March 26, 2021.)
Moreover, the BDC doesn’t expect any additional companies in its portfolio to become non-accrual in the first quarter of 2021.
Is New Mountain Finance stock’s dividend safe?
Well, according to the company’s latest earnings report, New Mountain Finance generated net investment income of $0.30 per share in the fourth quarter of 2020. (Source: “New Mountain Finance Corporation Announces Financial Results for the Quarter and Year Ended December 31, 2020,” New Mountain Finance Corp., February 24, 2021.)
In other words, the net investment income covered NMFC stock’s payout, but there was no margin for error.
In full-year 2020, the company earned adjusted net investment income of $1.25 per share. The dividends, on the other hand, totaled $1.24 per share for the year. So the BDC managed to outearn its dividend for the year.
Bottom Line on New Mountain Finance Corp.
Looking ahead, New Mountain Finance Corp.’s management said they’re confident in their ability to generate about $0.30 per share of net investment income on a quarterly basis to support the dividend “absent a dramatic change in market conditions.” (Source: Seeking Alpha, February 25, 2021, op. cit.)
So the payout is expected to continue at the current (very generous) level, but the margin of safety is quite thin. Still, because of the substantial insider ownership, this ultra-high yielder might be worth considering more than the rest.