A Double-Digit Yield to Consider?
In today’s market, few companies offer a dividend policy as generous as this one.
I’m talking about WhiteHorse Finance Inc (NASDAQ:WHF), a business development company (BDC) headquartered in Miami, Florida. The company specializes in lending money to lower-middle-market businesses with enterprise values of between $50.0 and $350.0 million. By earning interest payments from these loans, it can return cash to investors on a regular basis.
Right now, WhiteHorse Finance pays quarterly dividends of $0.355 per share, which comes out to an annual yield of 10.1%.
In other words, while WHF stock doesn’t sound like a familiar ticker to most people, it is actually one of the highest yielding names in the current stock market.
And that inevitably leads to one question: Is the dividend safe?
To answer that question, let’s take a look at the company’s investment portfolio.
WhiteHorse Finance Inc
As of March 31, WhiteHorse Finance had a $468.4-million investment portfolio diversified across 41 different companies. The portfolio consisted of 80% first lien secured loans, 17.2% second lien secured loans, and 2.9% equity. The weighted average effective yield on the company’s debt investments stood at 11.7% at the end of March. (Source: “Earnings Presentation Quarter Ended March 31, 2019,” WhiteHorse Finance Inc, last accessed July 15, 2019.)
Obviously, that’s quite a lucrative business. And the company’s focus on first lien secured loans helps it manage risk. When you are a lender of first lien, you will be the first one standing in line to get paid if the borrower defaults and goes through liquidation.
Still, the big question remains whether profits from this lucrative business are enough to support the company’s generous dividend policy.
Well, last year, WhiteHorse Finance earned a core net investment income of $30.7 million, or $1.496 per share. Considering the company declared total dividends of $1.42 per share during the year, those profits did cover the dividends. Although, with a payout ratio of 94.9%, the margin of safety was not very wide. (Source: “WhiteHorse Finance, Inc. Announces Fourth Quarter and Full Year 2018 Earnings Results,” WhiteHorse Finance Inc, March 6, 2019.)
In the first quarter of this year, WhiteHorse Finance’s core net investment income came in at $7.5 million, or $0.365 per share. So again, the amount covered its quarterly cash dividend of $0.355 per share. But this time, the payout ratio is at an even higher 97.3%. (Source: “WhiteHorse Finance, Inc. Announces First Quarter 2019 Earnings Results,” WhiteHorse Finance Inc, May 8, 2019.)
If you’ve been following this column, you’d know that I generally prefer to see companies pay out less than 90% of their profits so that, even if business slows down, they would still have a decent chance of covering their dividends.
However, keep in mind that, in the world of double-digit yielders, being able to outearn one’s dividend—which is what WhiteHorse Finance has done in 2018 and Q1 2019—is already quite an impressive feat.
Now, I should point out that, while the company outearned its dividend last year, it did not do so in every single quarter of the year. In particular, WhiteHorse Finance’s core net investment income exceeded its quarterly dividend in the first and fourth quarters of 2018, but fell short of its payout in the second and third quarters. (Source: WhiteHorse Finance Inc, March 6, 2019, op. cit.)
Still, there is one thing about WhiteHorse stock that makes it stand out among the ultra-high yielders: no dividend cuts.
The company completed its initial public offering in December 2012. Its first dividend, a payment of $0.108 per share, was prorated, reflecting a quarterly rate of $0.355 per share. Since then, management has maintained the same quarterly dividend. (Source: “Dividend History,” WhiteHorse Finance Inc, last accessed July 15, 2019.)
Bottom Line on WHF Stock
At the end of the day, keep in mind that the last time WhiteHorse Finance Inc reported earnings, it also reported a net asset value of $15.33 per share. But right now, WHF stock trades at just $14.04 per share.
In other words, if the company’s portfolio fundamentals haven’t changed much in the past several months, investors who purchase this 10.1% yielder today would get a sizable discount compared to its net asset value.