New Mountain Finance Offers High Prospects
The shift to investors seeking out higher investment yields is playing out, with the current expectation being that interest rates will be lower over the next few years.
You can look at higher-risk junk bonds for more significant yield, but it’s a risky option that demands rigorous analysis. Instead, a good high-yielding alternative is the business development company (BDC).
The mandate of a BDC is to make sound investments and deliver regular, consistent quarterly dividends along with the potential for some capital appreciation to investors.
The structure of a BDC is to deliver income for investors by making debt and equity investments in small- and medium-sized companies, including distressed companies. The BDC also provides capital and expertise to help companies grow or work on operational issues.
The income that flows from a BDC’s investments is paid as dividends to its shareholders. A BDC is required to distribute a minimum of 90% of its taxable income and tax-exempt interest annually.
With a market cap of $1.22 billion, New Mountain Finance Corp. (NASDAQ:NMFC) is worth a look. The BDC invests in upper middle market companies in the U.S. with an overweight in software companies. (Source: “Overview,” New Mountain Finance Corp., last accessed December 31, 2024.)
As of September 30, 2024, the top three industries New Mountain was invested in were software (32.2%), business services (20.5%), and health care (17.7%). The BDC’s portfolio had investments in 128 companies with a combined fair value of $3.28 billion. (Source: “Form-10Q,” New Mountain Finance Corp., last accessed December 31, 2024.)
Trading at $11.27 at the time of writing, NMFC stock was down from its 52-week high of $13.10 in December 2023 and its record $15.19 in May 2015.
Technically, NMFC stock is just below its 50-day moving average (MA) of $11.50 and 200-day MA of $12.11, which is where I see a good opportunity to enter.
Chart courtesy of StockCharts.com
Steady Results Positive for Dividends
New Mountain Finance Corp. reports revenues as total investment income and earnings as net investment income.
Total investment income jumped to $374.8 million in 2023, up 30.2% from $294.6 million in 2022 and $271.0 million in 2021. (Source: New Mountain Finance Corp., op. cit.)
In the third quarter, New Mountain Finance reported total investment income of $95.3 million versus $94.3 million a year earlier.
For the nine months to September 30, 2024, the BDC’s total investment income came in at $280.5 million, compared to $281.8 million for the comparative period in 2023.
The results offer a pathway to meeting the consensus estimate. Analysts estimate that New Mountain Finance will report total investment income of $373.7 million in 2024 and $359.0 million in 2025. (Source: “New Mountain Finance Corporation (NMFC),” Yahoo! Finance, last accessed December 31, 2024.)
On the bottom line, the BDC’s net investment income after adjustments jumped to $1.34 per share in 2023 versus $0.75 per share in 2022 and $2.07 per share in 2021.
In the third quarter, New Mountain Finance reported net investment income of $0.33 per share, down from $0.40 per share in 2022 and $0.02 short of the consensus.
Looking ahead, analysts expect net investment income of $1.39 per share in 2024, followed by $1.30 per share in 2025. (Source: Yahoo! Finance, op. cit.)
New Mountain’s balance sheet is typical of a BDC, with total debt of $1.99 billion at the end of September. The total debt to equity of 145.8% is manageable due to the steady profitability and free cash flow. (Source: Yahoo! Finance, op. cit.)
NMFC Stock Offers Strong Dividend Flow
New Mountain Finance paid a dividend of $0.32 per share in December, for a total $1.37 per share in 2024. This includes a supplemental dividend of $0.01 per share relating to the third quarter. (Source: Yahoo! Finance, op. cit.)
The BDC’s 2024 total dividends were below its $1.49 per share paid in 2023, but there were five payments in 2023. Prior to this, New Mountain paid out $1.22 per share in 2022.
NMFC stock’s December dividend equates to a forward yield of 11.36%.
The Lowdown on NMFC Stock
In addition to paying steady dividends, New Mountain Finance has also been active in buying back its shares.
The BDC announced that it would extend its stock repurchase program of up to $50.0 million by one year to December 31, 2025. New Mountain has bought back only around $2.9 million, so there could be strong buying in 2025, especially at the lower price. (Source: New Mountain Finance Corp., op. cit.)
I like the declining interest rate environment over the next few years and the pro business climate under President-elect Trump.
In the meantime, an investor gets NMFC stock at a lower price while collecting a steady, high-yielding dividend.