In certain sectors it is not uncommon for a company to raise capital in order to expand. Secondary offerings are fairly common with business development companies or "BDC's" and real estate investment trusts or "REIT's." When companies in these and other industries find additional investment opportunities, it makes sense to raise capital. Since additional funds are often re-invested at high rates and because most investors in these sectors are invested for the above-average yields these companies provide, (which will continue even after a secondary offering), there is really no reason for these stocks to decline sharply when secondary offerings are announced. However, many stocks do sell off after a secondary is announced and frequently the share price drops to levels that are even below where the company sold the stock, at least temporarily. Since we continue to live in a low interest rate world, it usually does not take long for investors to regain interest in these stocks and the share price often rebounds in a matter of a few days or a couple weeks. That is why buying secondary offering pullbacks in high-yielding dividend stocks has been paying off and probably will continue to work as a strategy going forward. With that in mind, here are two high yielders that just dropped in price due to a secondary offering and are now worth buying:
New Mountain Finance Corporation (NMFC) recently announced that it sold about 3.25 million shares in a secondary offering at a price of $14.80. This deal raised about $48.1 million, which gives the company additional investment funds. This stock was trading for about $15 per share before the offering was announced, but it dropped by roughly 6%, giving investors another buying opportunity. New Mountain Finance invests in debt and equity securities by making loans such as first and second liens, unsecured notes, etc. It invests in a range of industries, which creates portfolio diversification and it focuses on companies with solid management, secular growth, strong cash flow, and a high barrier to entry. Some of the companies in its investment portfolio include Pods, Inc., Rocket Software, Inc., Stratus Technologies, Inc., Insight Pharmaceuticals, LLC., and Immucor, Inc. A major positive is that multiple insiders have been buying this stock for the past several months. For example, on November 9, Robert Hamwee (an officer), purchased 10,000 shares in a deal valued at $145,700. In addition, other insiders have also been buying. With this stock down from recent highs and with a yield of nearly 10%, it makes sense to consider following the insiders and buy this stock.
Here are some key points for NMFC:
Current share price: $14.30
The 52-week range is $12.95 to $15.83
Earnings estimates for 2012: $1.34 per share
Earnings estimates for 2013: $1.36 per share
Annual dividend: $1.36 per share, which yields nearly 10%
Fifth Street Finance Corp. (FSC) just announced a secondary offering in which it sold about 14 million shares at $10.68, raising around $149.5 million. This stock was trading near $10.80 before this news was announced, but it has dropped by about 5% and could remain under pressure for a few days as investors absorb the extra shares. However, this can be a buying opportunity for longer-term investors due to a number of reasons. Fifth Street is set up as a business development company that is focused on making loans and investments in small to mid-sized firms. By making loans and equity investments in a range of companies, it is able to return profits through a strong dividend yield to shareholders. It often invests in sectors such as healthcare, manufacturing, energy, defense, technology, marketing and others. Some of the companies in its investment portfolio include: Genoa Healthcare (pharmaceuticals), Titan Fitness (leisure facilities), Phoenix Brands (household products), and ReBath (home improvement). Insiders have also been buying shares of this company in 2012. For example, On August 28, 2012, Leonard Tanenbaum (the CEO), bought 5,000 shares in a transaction worth about $53,400, and another 5,000 shares on August 27, in a transaction valued at $52,350. With a pullback in the stock and a outsized yield of about 11%, this stock is worth considering, especially since it is one of the few that pays a dividend every month rather than on a quarterly basis. It pays a monthly dividend of about 9.6 cents per share.
Here are some key points for FSC:
Current share price: $10.45
The 52-week range is $8.99 to $11.08
Earnings estimates for 2012: $1.15 per share
Earnings estimates for 2013: $1.15 per share
Monthly dividend: 9.6 cents per share, which yields about 11%
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.