The following information was previously provided to subscribers of Premium BDC Reports along with:
- NEWT target prices/buying points
- NEWT risk profile, potential credit issues, and overall rankings
- NEWT dividend coverage projections and worst-case scenarios
Summary
- I will be updating the projections and pricing for NEWT to take into account the following information including the increased 2021 dividend forecast of $3.00 to $3.30.
- NEWT reported below base-case projected ANII of $1.154 per share mostly due to timing differences of SBA 7(a) loans that were funded but not sold.
- This will likely drive a stronger Q2 2021 and will be taken into account with the updated report. However, this is likely already priced into the stock that remains a ‘Hold’.
- The company declared a Q2 2021 dividend of $0.70 per share which is a 25%increase over the Q2 2020 dividend. As shown below, $0.70 per share was the best-case projected Q2 2021 dividend from the previous projections.
This update discusses Newtek Business Services (NEWT) which is an internally-managed BDC that was previously added to the suggested ‘Total Return’ portfolio. As discussed later, NEWT has a differentiated and diversified model that provides multiple streams of revenue including loan origination, including SBA 7a loans, 504 loans, PPP loans (Paycheck Protection Program), and conventional loans. Also, the company provides various services to small and medium businesses including electronic payment processing, payroll processing, web solutions, insurance services, and technology:
As shown below, analysts are expecting lower earnings in 2022 which is expected and NEWT’s management has a variable dividend program and will adjust accordingly as not to overpay. This is obviously a good thing for the company but investors should expect lower dividends next year and I will continue to adjust NEWT’s target prices to accommodate.
NEWT Dividend Discussion & Expectations
I will be updating the projections and pricing for NEWT to take into account the following information including increased 2021 dividend forecast of $3.00 to $3.30 per share for 2021 as well as guidance from management on the upcoming earnings call. Also, the company has not released its updated 10-Q so we have limited information regarding non-accruals and NAV.
NEWT uses Adjusted Net Investment Income (“ANII”) as a measure of its operating performance which includes short-term capital gains from the sale of the guaranteed portions of SBA 7a loans and a non-conforming conventional loan, capital gain distributions from controlled portfolio companies, which are reoccurring events. Additionally, NEWT’s business model is seasonal/cyclical in nature which is why the company pays an irregular/variable quarterly dividend and is managed on annual basis (not quarterly).
For Q1 2021, NEWT reported below base case projected ANII of $1.154 per share mostly due to timing differences of SBA 7a loans that were funded but not sold. This will likely drive a stronger Q2 2021 and will be taken into account with the updated NEWT Projections & Pricing report. The company declared a Q2 2021 cash dividend of $0.70 per share which is a 25% increase over the Q2 2020 dividend of $0.56 per share, and a 52% increase over the Q2 2019 dividend of $0.46 per share. As shown below, $0.70 per share was the best case projected Q2 2021 dividend from the previous projections.
The last three lines in the table below use the average over the last four quarters to help identify trends in dividend coverage.
NEWT’s NAV per share increased by another 5.4% but the company has not released its updated 10-Q so we do not have the details as well as non-accrual information.
NEWT currently has ‘Level 1’ dividend coverage mostly due to the positive impacts from continued stimulus programs discussed in the previous report that has also helped with the recent NAV performance:
From previous call: “We still believe that there is pandemic effects that reduced valuation, although we also believe that the stimulus that we’re having in the economy is certainly improving all asset values and we do and hope that we can anticipate seeing the NAV rise again in the future.”
NEWT increased its 2021 annual dividend forecast from $2.40 to $2.90 to $3.00 to $3.30, with a midpoint of $3.15, which is 54% higher than the amount of dividends paid in 2020.
In April 2021, the company signed a joint-venture agreement to originate commercial loans to middle-market companies as well as small businesses and is currently negotiating an additional joint-venture agreement with a global investment management firm with over $500 billion in assets under management.
Full BDC Reports
This information was previously made available to subscribers of Premium BDC Reports. BDCs trade within a wide range of multiples driving higher and lower yields mostly related to portfolio credit quality and dividend coverage potential (not necessarily historical coverage). This means investors need to do their due diligence before buying.
