Newtek: Massive Gains To Date, And More Dividend Growth To Come
May 27, 2021
Summary
Newtek has performed very well in early 2021, both in terms of generating share price gains, and operationally.
This year will see the company return record amounts of cash to its owners.
Investors get a high dividend yield, but the outlook for 2022 and beyond is less certain for now.
Article Thesis
Newtek Business Services (NEWT) is a business development company that has performed well during the pandemic and continues to generate strong results. Shares have risen by more than 60% in 2021, but they may still be attractive for investors, especially since the company recently announced that it would boost its dividends massively this year. Investors can, despite recent strong share price gains, still get a yield of close to 10% from Newtek right here.
Strong Performance For The Stock And The Business
Looking at Newtek's stock performance in 2021, we see that shares have risen by a very attractive 61% so far, not including dividends yet, which added another couple of percentage points. That is, for a five-month span, a very strong gain. This was driven by two factors, which are multiple expansion (mainly due to the fact that the market realized the outlook is a lot better than previously thought) and a strong operating performance.
Newtek's business, even though it may sound like a cyclical business that is vulnerable during recessions, has actually performed well during 2020, and even more so in early 2021. Demand for loans from small and medium-sized businesses was high during 2020, which allowed Newtek to offer a large number of loans to the companies it is doing business with. This is why, overall, revenues rose quite a lot last year, especially during the second quarter, when Newtek saw massive tailwinds from government programs that were aimed at providing liquidity for small businesses across the US, such as the Payment Protection Program (PPP). These were, in many cases, issued through banks or BDCs like Newtek, which earned large fees on those loan originations, which came with very little additional risk for these financial corporations.
In 2021, Newtek will, according to management, generate attractive business growth as well, on the back of the economic reopening across the US that will see businesses expand their operations, which translates into demand for additional liquidity. Newtek does, unlike many other BDCs, also offer other services and solutions to its customers on top of providing loans, including merchant solutions, technology services, and insurance agency solutions. Demand for the first two, primarily, is tied to economic growth, thus Newtek should see tailwinds for these services that it provides for customers during the current year, as the economy is getting back on track. Since the US government continues with its very loose fiscal policies, even the pandemic-related business units Newtek profited from in 2020 will continue to generate results in 2021. Newtek is, for example, forecasting that it will fund more than $600 million of PPP loans this year, with more than 10,000 individual clients being served by Newtek. Newtek also plans to issue hundreds of millions of dollars worth of loans through the SBA programs 7(a) and 504. These loans, partially guaranteed by the Small Business Administration, come with relatively low risks for Newtek and are thus very attractive for the company to issue. The same holds true for PPP loans, which are 100% guaranteed by the federal government, which means that there is no credit risk for Newtek at all.
Thanks to these tailwinds for its business, Newtek was able to generate a highly attractive adjusted net investment income of $1.05 per share during the first quarter, a massive increase versus the previous year's first quarter, which had seen below-average loan issuance. The company also was able to increase its net asset value per share by a highly attractive 5.4% during the first quarter, which is well north of 20% annualized. This was possible despite high dividend payments of $0.50 per share during Q1. It should, however, be noted that Newtek's current net asset value per share, even following Q1's strong growth, stands at below $17, and is thus substantially smaller than the company's current share price. Due to the fact that Newtek does not generate all of its earnings through its loan portfolio, but also through services such as merchant solutions, Newtek's NAV is, however, less telling than that of more traditional BDCs, where NAV and earnings are closely tied to each other.
Newtek's solid performance in recent years, including during the pandemic, has allowed the company to access capital markets at more favorable terms compared to the past - with relaxed monetary policy by the Fed likely playing a role as well. Newtek has, during the first quarter, issued baby bonds with a yield of 5.5%, using the proceeds to retire older debt at a rate of 6.5%. Even though a 5.5% rate isn't ultra-low, this is still better than the rates the company had to pay in the past, and since maturities were also pushed back through this transaction (to 2026, instead of 2023), this also improves Newtek's debt maturity schedule.
2021 Will Be A Great Year, And Investors Will Get Massive Dividends
Due to the aforementioned tailwinds for Newtek during this year, the company is expected to earn $3.10 this year, according to the analyst community consensus estimate. Newtek's management seems to see even higher profits, although no exact guidance has been given so far. This can be deducted from the following slide:
Source: Newtek presentation
With dividends being forecasted at $3.15, plus or minus $0.15, and due to the goal of covering dividend payments with the taxable income that Newtek generates, one could assume that management sees profits of $3.15, or potentially even more than that. But even when we go with the current analyst consensus estimate of $3.10, that would still be a steep increase versus the $2.06 that Newtek has earned in 2020. This year's expected net profits are also way higher than the $2.32 that Newtek earned in 2019 before the pandemic hit.
Newtek's dividend forecast of $3.15 for the current year compares very favorably to past dividend payments, which totaled $2.05 in 2020, and $2.15 in 2019. On a year-over-year basis, Newtek plans to increase its dividend by more than 50% in 2021, using the midpoint of management's guidance. It should be noted that management guidance has oftentimes been conservative in the past and that investors have seen several upside revisions. There is, of course, no guarantee that this will happen again.
Based on a current share price of $33, shares offer a dividend yield of 9.5% at the midpoint of the guidance range. Since $1.20 has been declared for Q1 and Q2, Newtek will pay about $1.95 during H2, which will equate to ~6% of the current share price. Since the Q2 dividend has not yet been paid (the ex-date is June 14), investors that buy today would receive about $2.65, or 8% of their investment between today and the end of the year.
The news about the increased dividend forecast for 2021 has propelled shares higher, and together with the previous gains during early 2021, Newtek has now delivered a huge return for investors this year. Even though shares are still not looking expensive relative to this year's expected earnings, it is, of course, clear that Newtek will not continue to deliver returns of 10% a month as the stock has done so far in 2021. It should also be noted that the current analyst consensus sees earnings decline in 2022 relative to what is forecasted for 2021, so Newtek's stock may stop its upwards trajectory in the foreseeable future.
Takeaway
Newtek is an attractive BDC with strong management, a great track record, and a diversified business model that does not solely rely on loan issuance. We first issued a bullish rating on Newtek on January 2 on Seeking Alpha's public site, and about one month earlier on Cash Flow Kingdom. Shares are up by 65% and 80% since those articles were published, not including dividends. Newtek will continue to return large amounts of cash to its owners this year, and its dividend yield still looks quite attractive. Since there is the possibility that dividends get cut in 2022, if the analyst community is right about earnings declining next year, I personally don't plan to add to my Newtek position right here, following this year's strong run. But those that want to see a large cash return this year, and that is more optimistic about Newtek's growth potential in 2022 and beyond may still find shares attractive today, even after the large share price gains that investors already experienced over the last couple of months.
