New Mountain Finance Corporation (NYSE:NMFC) is set up as a business development company that is focused on investing in debt and equity securities. It makes a variety of loans such as first and second liens, unsecured notes and it invests in mezzanine securities as well as equities. It seeks companies that are experiencing secular growth, and have high free cash flow, along with a high barrier to entry.
This company makes debt and equity investments in a variety of small to midsized companies in industries such as software, education, manufacturing, healthcare services, financial services, etc. It has made debt and equity investments in companies like Pods, Inc., Rocket Software, Inc., Stratus Technologies, Inc., Insight Pharmaceuticals, LLC., Immucor, Inc., and many others. Here are 3 reasons why some investors should consider buying this stock, especially on dips:
1) Insiders appear to find value in the stock: On September 6, James Stone (an officer) bought 10,500 shares in a transaction valued at $154,000. He also bought 4,100 shares on September 4, and this follows more insider buying that occurred earlier this year. On August 20, David Malpass (a director) bought 6,250 shares in a transaction valued at $90,000, and on August 19, he bought 10,000 shares in a transaction valued at $145,000.
2) New Mountain Finance Corporation recently reported solid financial results. For the second quarter ended June 30, 2012, the company announced net investment income of 35 cents per share. It also stated that net asset value or book value was $13.83 per share, at the end of the quarter.
3) It's about the dividend: Many dividend stocks are at or near 52-week highs, and that has pushed yields down. We already know that money parked in cash or money market accounts will earn little or nothing and that is what has made dividend stocks so attractive.
But with many popular dividend stocks trading at stretched valuations, the yields might not be enough to compensate investors for the risks of owning stocks. For example, General Electric (NYSE:GE) which is known for many industrial products, also has a major finance division which provides loans to businesses and consumers. In some ways, a case can be made that GE's finance division has some similarities to this company in terms of credit risks, and other potential issues that are part of the finance industry. However, while GE shares trade close to a 52-week high and with a yield of just 3.1%, New Mountain Finance stock yields nearly triple, at 9.1%. That means it could take about 3 years for GE shares to provide the level of dividend income that this company could provide in just a single year.
While GE is a different, far larger and more diversified company, it is getting harder to justify owning stocks that yield just about 3%. That's because a bad market day, negative news, or an earnings miss can easily wipe out a year's worth of dividend income in a single day. With a very generous yield, and with insiders continuing to accumulate shares, New Mountain Finance stock could reward investors, especially those who buy on dips.
Here are some key points for NMFC:
Current share price: $14.97
The 52 week range is $12.05 to $15.38
Earnings estimates for 2012: $1.34 per share
Earnings estimates for 2013: $1.38 per share
Annual dividend: $1.36 per share which yields 9.1%
Here are some key points for GE:
Current share price: $22.15
The 52 week range is $14.02 to $22.37
Earnings estimates for 2012: $1.54 per share
Earnings estimates for 2013: $1.73 per share
Annual dividend: 68 cents per share which yields 3.1%
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informational purposes only. You should always consult a financial
Disclosure: I 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.