Newtek Business Services Corp: This 10.8% Yielder Is Better Than It Looks
A High-Yield Stock Worth Watching
If you take a look at the latest dividend announcement from Newtek Business Services Corp (NASDAQ:NEWT), you might feel a bit disappointed.
On November 11, Newtek’s board of directors of declared a cash dividend of $0.47 per share for the fourth quarter of 2020. The dividend will be paid on December 30 to shareholders of record as of December 18. (Source: “Newtek Business Services Corp. Declares Fourth Quarter 2020 Dividend of $0.47 per Share,” Newtek Business Services Corp, November 11, 2020.)
Considering that NEWT stock’s third-quarter dividend payment was $0.58 per share, the announcement seems like a dividend cut.
But the situation may not be as bad as it looks. You see, Newtek is not a company that sets a quarterly dividend rate and sticks to that payout. Instead, it follows a variable dividend policy.
For instance, the company’s per-share payouts were $0.40, $0.46, $0.58, and $0.71 in the first, second, third, and fourth quarters of 2019, respectively. This year, the dividends for the four quarters—including the recently announced dividend—are $0.44, $0.56, $0.58, and $0.47 per share. (Source: “Dividend and Split History,” Newtek Business Services Corp, last accessed November 18, 2020.)
That brings the total payout for 2020 to $2.05 per share. Considering that the company’s revised annual dividend forecast for 2020 was $1.90 to $2.20 per share, I’d say that the fourth-quarter payout level is not a disappointment.
Plus, if we annualize the seemingly lower fourth-quarter dividend, we arrive at a payout of $1.88 per share. With Newtek stock trading at $17.36 per share, that annualized payout translates to a dividend yield of 10.8%, which is not bad at all in today’s low-yield environment.
Of course, when it comes to companies with variable dividend policies, the method of multiplying the quarterly payout by four and dividing by the share price does not provide the most accurate picture of its dividend-paying ability—although that’s what most financial web sites do to calculate a stock’s dividend yield.
As forward-looking investors, we want to know how much we can get paid if we buy the stock now and hold it for a year. In other words, we want to know the forward yield.
But here’s the challenge: in its latest dividend announcement, Newtek said “The Company’s Board of Directors expects to maintain a dividend policy with the objective of making quarterly distributions in an amount that approximates 90 – 100% of the Company’s annual taxable income.” (Source: Newtek Business Services Corp, November 11, 2020, op. cit.)
So without knowing Newtek Business Services Corp’s annual taxable income, it’s hard to say what the payouts will be.
At this point, it’s important to know that one of the reasons behind Newtek’s decision to pay out 90% to 100% of its annual taxable income is that it chooses to be regulated as a business development company (BDC). BDCs are tax pass-throughs, meaning as long as a BDC distributes at least 90% of its profits to investors, it pays little to no income tax at the corporate level.
Most BDCs are in the middle-market lending business, but Newtek does more than just lend money. The company also provides a wide range of business and financial solutions to small and medium-sized businesses, such as electronic payment processing, cloud computing, technology consulting, e-commerce, accounts receivable financing, inventory financing, insurance, payroll solutions, and benefits solutions.
Unsurprisingly, the COVID-19 pandemic has impacted the BDC’s business. In the first nine months of 2020, Newtek earned adjusted net investment income of $1.61 per share, down 2.4% from the year-ago period. (Source: “Newtek Business Services Corp. Reports Third Quarter 2020 Financial Results,” Newtek Business Services Corp, November 4, 2020.)
However, in the third-quarter earnings release, management did provide a dividend forecast. For full-year 2021, they expect the BDC to pay a cash dividend between $2.00 and $2.50 per share.
Note that the forecast doesn’t include “any potential impact of any possible future authorization of the U.S. Small Business Administration (‘SBA’) Paycheck Protection Program (‘PPP’).” (Source: Ibid.)
If there’s a renewed PPP, it could give Newtek an opportunity to generate additional income from funding PPP loans.
Bottom Line on NEWTEK Business Services Corp
The reality is that the forecast range for Newtek is quite wide. But even if the company meets just the low end of its forecast range and pays $2.00 per share in dividends next year, it would offer a yield on cost of 11.5% based on the current share price.
And that means NEWT stock remains a very attractive ticker for yield-seeking investors.