NEWT Stock: This 7.8% Yielder is Better Than It Looks
This is One Unique BDC
Longtime readers of Income Investors would know that I’m a big fan of business development companies (BDCs). These companies usually provide loans to middle-market businesses in the U.S., earning oversized interest income in the process. In turn, they tend to pass that income to investors through generous dividend payments.
At first glance, NEWTEK Business Services Corp (NASDAQ:NEWT) seems like just another BDC. The company provides financing solutions to small- and medium-sized businesses and collects interest payments from its lending portfolio. And like many BDCs, it offers a rather generous dividend yield.
If you dig a little deeper, though, you’d see that NEWTEK just might be the most interesting BDC in today’s market.
Offering Customers More Than Just Loans
The first thing that makes NEWTEK Business Services Corp stand out is the breadth of its operations.
Like I said, the company runs a lending business, which is what most BDCs do.
The neat thing is, though, while NEWTEK earns interest income from its loan portfolio, lending is not its only business. As a matter of fact, the company offers a whole suite of business services, including electronic payment processing, payroll management, health insurance and benefits, web design, and even full e-commerce business solutions.
And while NEWTEK might not sound like a familiar name to consumers, it has built a solid reputation in the business community. NEWTEK, along with its controlled portfolio companies, offers products and business solutions to more than 100,000 small- and medium-sized business accounts across all 50 states. (Source: “Raymond James Institutional Investors Conference,” NEWTEK Business Services Corp, last accessed April 2, 2019.)
Therefore, compared to other BDCs, NEWTEK runs a much more diversified business and has multiple sources of income.
And because the company is still structured as a BDC, it has to return most of its profits to shareholders through regular dividend payments. So while NEWTEK is different from many of its peers, it still maintains the income investor-friendliness of BDCs.
Earn a Yield Higher Than What It Says on Google Finance
Speaking of dividends, here’s the second reason why NEWT stock is special.
You see, last month, NEWTEK Business Services Corp paid a quarterly dividend of $0.40 per share. If you check any of the financial websites, you’ll see that the NEWT stock offers an annual dividend yield of 7.8%.
Here’s how the websites arrived at this number: They take the annualized amount of the company’s quarterly dividend, and divided it by its share price.
NEWTEK stock currently trades at $20.47 per share. With an extrapolated annual dividend rate of $1.60 per share (calculated by multiplying its quarterly dividend by four), the company offers an annual yield of 7.8%.
This 7.8% is what’s being displayed as NEWT stock’s annual dividend yield by Google Finance, Yahoo! Finance, and MarketWatch as of this writing.
The neat thing is, if an investor goes out and buys NEWTEK Business Services Corp’s common shares today, I’m quite confident that they’ll earn a dividend yield higher than these financial website’s stated amount of 7.8%.
How’s that possible? Well, that’s because in each calendar year, the four quarterly dividends paid by NEWTEK are not the same. For instance, in the first quarter of 2018, NEWTEK paid $0.40 per share. The amount went up every three months and by the fourth quarter, had grown to $0.50 per share. (Source: “Dividend and Split History,” NEWTEK Business Services Corp, last accessed April 2, 2019.)
Due to higher payouts over the quarters, NEWTEK paid total dividends of $1.80 per share in 2018, which was more than the annualized payout based on its first quarter dividend of $0.40 per share paid for that year.
Looking further back, we see that the company has been following this pattern (increasing payouts during the course of the year) for a while. In 2017, its per-share dividends for the first, second, third, and fourth quarters were $0.36, $0.40, $0.44, $0.44, respectively.
Of course, past performance does not guarantee future results; how do we know whether NEWTEK will follow this patter in 2019?
Well, in the latest earnings report, the company said explicitly that it intends to pay an annual cash dividend of $1.84 per share in 2019. That would represent a 2.2% increase over the $1.80 per share paid last year. (Source: “Newtek Business Services Corp. Reports Full Year 2018 Financial Results,” NEWTEK Business Services Corp, March 6, 2019.)
Now, keep in mind that based on the current quarterly dividend of $0.40 per share, the annualized payout—which financial web portals use to calculate its annual yield—is $1.60 per share. Therefore, if the company achieves its target and pays $1.84 per share in 2019, shareholders would collect dividends that are 15% more than what’s indicated by Google Finance.
The Bottom Line on NEWTEK Business Services Corp
At the end of the day, note that the company has also maintained a safe payout. Last year, NEWTEK earned an adjusted net investment income of $36.4 million, or $1.94 per share. The amount not only represented a 9.6% increase year-over-year on a per-share basis, but also provided more than enough coverage for its total dividends of $1.80 per share paid for the year.
NEWTEK Business Services Corp may appear to be just another BDC, but it has a diversified income stream and is on track to pay more than the stated 7.8% yield. As it stands, NEWT stock could be an opportunity.