Newtek Business Services share: a high and risky dividend

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I would like to thank Badsha Chowdhury, my fellow Seeking Alpha contributor and co-author of this analysis, for his time, perspective and expertise. I think this analysis is both more comprehensive and more finely nuanced than it otherwise would be. to be without the efforts of Badsha.

Insight

Newtek Business Services Corp (NASDAQ: NEWT) is a business development company currently reorganizing to become a bank. In August 2021, NEWT announced its intention to acquire National Bank of New York as part of its repositioning plan as a bank holding company.

NEWT is currently trading near its 52-week low at $15.70 after falling almost 27% last month. Based on its latest quarterly dividend ($0.65) and current share price ($15.79), the forward yield is tempting at over 16%. We believe that NEWT is a dangerous value trap with a dividend likely to be reduced. This analysis will focus on NEWT’s valuation relative to its peers, balance sheet and recent quarterly results; shareholder value creation and dividend history; dividend security and payout ratio; and performance ratings and outlook.

Matrix assessment – NEWTs and peers

NEWT and seven peers with forward dividend yields greater than 10% were valued using a multi-factor matrix. A higher matrix score indicates superior investment relative to peers; NEWT got the lowest score among its peers.

Matrix scores

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Authors

The matrix was designed and calculated by the authors with data from Seeking Alpha and can be downloaded as an Excel file.

The matrix score is the sum of the normalized factors for dividend yield, dividend payout ratio, EV/sales, price/pound, growth and debt.

Matrix bar chart

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Authors, SA data

The NEWT matrix score of -3.31 was the lowest with just one factor, dividend yield, comparing favorably to its peers. The NEWT, EV/Sales and Price/Book payout ratio were slightly below peer averages. The growth of NEWTs has been significantly lower than the average of its peers.

Balance sheet

Assessment: 2012 – Present

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Authors, SA data

At first glance, NEWT’s balance sheet is not alarming, with the growth in assets roughly matching the increase in liabilities over the past 10 years. However, recently, long-lived assets and tangible book value have stagnated while debt has grown rapidly.

2nd quarter turnover

NEWT most recent quarterly results are also worrying with several alarming declines from 2Q21 to 2Q22.

  • Total investment income decreased 47.5% from $36.6m in 2Q21 to $19.2m in 2Q22. Total investment income decreased 47.5% from $36.6m in 2Q21 to $19.2m in 2Q22.
  • Net investment income decreased 113% from $15.5m in 2Q21 to a loss of $2.3m in 2Q22.
  • Adjusted net investment income decreased 37.5% from $27.0m in 2Q21 to $18.1m in 2Q22.
  • Net asset value decreased by $0.07/share from $16.38/share in 2Q21 to $16.31/share in 2Q22.

And finally, a bit of good news, NEWT’s total investment portfolio increased by 8.8%, from $696.1 in 2Q21 to $757.1M in 2Q22.

Shareholder Value Creation and Dividend History

Dividend/Share, Book Value/Share and Number of Shares

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Authors, SA data

Over the past ten years, NEWT has increased book value per share by more than 70%, from $9.50 to $16.31 per share, while paying total dividends of $17.43 per share. More recently, book value per share has stagnated while shareholder dilution has increased.

10 year price return

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Looking for Alpha

Over the past 10 years, NEWT has been a very good investment with a total return of over 400% compared to around 217% for the S&P500. More recently, NEWT underperformed even a falling S&P500.

1 year price return

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Looking for Alpha

Over the past year, the NEWT’s total return of -27.64% has lagged the S&P500’s drop of over 13%. The biggest drop coincides with a broader drop in early June on inflation and jobs data. NEWT also fell on Aug. 9 after a $514,000 shortfall in the second quarter and a 47% drop in year-over-year revenue. Recently, the NEWT fell more sharply than the S&P500 during the last Federal Reserve rate hike.

Dividend Security

We think NEWT’s 15% forward yield, while tempting, makes NEWT a particularly dangerous stock to buy or even hold right now.

Dividend payout ratio

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Author, SA data

In the last four quarters shown, NEWT has paid shareholders more dividends than it has earned per share. The payout ratio was 159% and 130% in 4Q21 and 1Q22 respectively. Business development companies are allowed to avoid corporation tax if they pay at least 90% of their annual taxable income to shareholders, but payout rates above 100% are neither safe nor sustainable. In fact, NEWT recently cut its quarterly dividend by 13%, from $0.75 to $0.65/share.

Seeking Dividend Alpha Ratings – Compared to the Financial Sector

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Looking for Alpha

Seeking Alpha’s dividend scorecard reflects the dangerous payout ratio. Although NEWT receives an A+ for yield, it receives relatively low scores for security, growth, and consistency.

Notes and outlook

NEWT ratings from Seeking Alpha and Wall Street analysts reflect recent poor performance and a lackluster outlook.

Searching for alpha factor ratings

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Looking for Alpha

Currently, Seeking Alpha rates NEWT at Hold with an A+ rating for Valuation, but poor ratings for Growth, Profitability, Momentum, and Earnings Review. Most scores decreased over 3 months and over 6 months.

Wall Street Ratings

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Looking for Alpha

NEWT is currently covered by 4 Wall Street analysts with a generally lackluster outlook for the stock. Recently, an analyst moved NEWT from sell to hold. Maybe this analyst concluded that NEWT is quite cheap. We do not agree.

Conclusion and recommendations

Based on a multi-factor matrix, NEWT is a lower investment compared to its peers. Although the NEWT is near its 52-week low, we believe it is still overpriced. The 15% dividend is not supported by earnings with a recent payout ratio of 130% and a poor dividend safety rating due to the search for alpha. NEWT’s most recent quarterly report was bad news on almost every front and recent stock performance even lagged the S&P500’s fall.

Seeking Alpha and Wall Street analysts, NEWT is on hold; we feel both are overly optimistic. We are convinced that NEWT’s dividend is precarious and at risk of being cut again, which will lead to a massive sell-off and a drop in the share price. Although NEWT has been a great investment over the past 10 years, we believe investors have suffered enough this year. We recommend investors who hold NEWT to sell at the current market price.

Seek not to have things done as you wish, but wish them as they are, and you will find them. – Epictetus

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