Sold My Newtek Because Of Dividend Uncertainty

| About: Newtek Business (NEWT)

Summary

NEWT bases its dividend projections on share count instead of a fixed amount.

Share dilution via secondaries could affect that projection and lower my income stream.

My investing is based on increasing dividend streams, so I sold my Newtek.

Unclear guidance from Newtek (NASDAQ:NEWT) on the dividend convinced me to sell it. I'll be honest, performance was an issue. If the stock had been performing well, I probably would have ignored the feeling that I had to read between the lines when evaluating the company's press releases.

These are the items that I didn't have a good feeling about:

Size Of The Special Dividend

When first discussed in November 2014, the size of the special dividend to be paid in late 2015 was estimated to be $4.50. By August 2015, it was down to $3.29. When declared, it became $2.69 (estimating that only 27% would be in cash).

The last decline was particularly disturbing for me because the dividend was declared on Oct. 1 at $3.29 based on the 10.2 million shares outstanding. One week later, NEWT made an offering of 2.1 million shares. So it declared a dividend of a certain amount, knowing well that the amount was going to be significantly different because of the share offering.

To the untrained eye, it seemed like NEWT was paying for the special dividend by issuing the secondary. 2.1 million shares of the secondary at the price of $16.50 is $34.5 million. The cost of the special dividend? About $33 million.

Of course, the share dilution drove the share price down. Even with a little spike at the end, just prior to ex-dividend, the share price closed at $17.22. It had been $19.02 two days before the secondary announcement. And, of course, when the stock went ex-dividend, the price dropped by $2.69. It closed at $14.31, a number that has only gone lower.

It was almost like we paid twice for that special dividend. Then, on Dec. 31, when the dividend was paid and it was 73% in the stock, the share count rose to 14.5 million shares. Whether it was because of further dilution or just the general malaise in the market (or both), NEWT continued to sink and now sits at $10.75 as I write this. It almost seemed like we paid for the special a third time.

Regular Dividend Amount

In its initial look at dividends for 2015, the company estimated $1.80. It upped that a couple times during the year to $1.82, and even stated in August:

"We have formally announced in the release last night that our annual cash dividend of $1.82, which is being paid quarterly, will be maintained. I want to repeat this particular point because I get asked this quite a bit. The special dividend that we're about to talk about will not affect the quarterly cash dividend."

In the end, the dividend for 2015 became $1.76. When the last dividend for 4Q of 2015 was declared, it was stated that:

"...confirming that its 2015 annual dividend will equal $20.9 million, or $1.76 per share, which is consistent with prior guidance."

So in the end...at least in my opinion, the special dividend did certainly affect the quarterly cash dividend. The final fourth-quarter dividend was $0.40 (down from $0.50 for the third quarter). That would represent a $1.60 annual dividend, lower than the $1.76 for all of 2015.

And now, NEWT has released its projected dividend for 2016 at $1.50, so somewhere in 2016, the $0.40 rate is going to be cut again by 6.25%. Yet, despite lowering its dividend from $1.76 annually to $1.50 a year, the press release said that it represents a 4.3% increase over 2015. That's because the company is basing it on the total dollars paid and not the per share dividend.

And...notice that the $1.50 estimate is based on the 14.5 million shares outstanding as of Dec. 31. So, if there's more share issuance, the dividend per share might come down again.

In every case, it seems like the company couched its statements by basing it on the existing share count at the time it made them. But I want to have a good feeling when I hear the CEO speak. I don't want to have to parse the meanings of every word.

So that's why I made the decision to bail on NEWT. The company might be severely underpriced and comes back like crazy. But my investing is based on an ever-increasing income stream, and right now, I'm guaranteed a certain 6.25% cut, and if more secondary offerings are made, that might lower the dividend per share that goes into my pocket even more.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.