AFC Gamma: A 10% Raise On This 11% Yield

Mar. 14, 2022 7:00 AM ETAFC Gamma, Inc. (AFCG)56 Comments
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BeanKounter Capital
4.16K Followers

Summary

  • AFCG just hiked the dividend again, this time by 10% to $0.55.
  • The valuation is still cheap, with a single digit earnings multiple and a rapidly growing loan portfolio.
  • Investors should be aware of the external management and the dilutive equity issuances used to fuel growth.
  • Shares are still a strong buy under $20 and investors can collect a yield over 11%.

Little piggy banks on ascending stacks of coins

PM Images/DigitalVision via Getty Images

Investment Thesis

AFC Gamma (NASDAQ:AFCG) is one of the few businesses providing capital to the cannabis industry. The company went public in 2021 and the share price hasn’t gone anywhere, despite impressive dividend growth. The company continues to grow its loan portfolio and sports a solid balance sheet and impressive revenue growth. Investors should be aware that the growth has been somewhat dilutive, as shares outstanding more than doubled in 2021. The company is externally managed, which is a risk, but it is offset by a plan to internalize management as well as huge insider ownership. Investors that are willing to take the time to understand the business and its uncertainties might be richly rewarded by a small position in AFCG.

The Business

If you want a more in-depth breakdown of the business, I recommend reading my previous article on AFCG. I go over the insider ownership and why I don’t think the external management is a reason to avoid AFCG. If you are interested, the 10-K goes into some of the nuances with the external manager compensation. In my opinion, it’s not material to the long-term bullish thesis on AFCG, but investors should be aware of the arrangement and make that judgment for themselves.

I also talked about the debt issuance, strong balance sheet and impressive revenue growth which has continued since my last article. Based on the most recent investor presentation, the company only added one loan to the portfolio in Q4, but it was a large loan for the company, with a value of $60M. The growth is likely to be lumpy based on the timing and size of the new loans, but I am expecting continued growth of the loan portfolio in 2022. One of the reasons I am considering adding to my position is that shares have sold off in the last couple months along with the rest of the market.

Valuation

I will keep pounding the table as long as the business keeps humming along and the valuation stays in the same range that it is in right now. Shares currently trade at an earnings multiple of 9.7x. We don’t have a long operating history as a public company, but the average multiple has been 12.3x. I won’t pretend to put a fair value multiple range on the stock, but I think 15x would make sense to me with the growth of the loan portfolio.

AFCG Stock P/E

Price/Earnings (fastgraphs.com)

The bullish thesis is that the dividend will continue to grow to the point that the market can no longer ignore the small size of the company. Either way, I think that the company is cheap today and investors looking off the beaten path for income might want to consider AFCG.

Another Dividend Hike

To be perfectly honest, I can’t think of another REIT that has raised their dividend at a rate that is anywhere near AFCG’s growth rate in the last year (if you know of one, leave it in the comments below. If it’s anywhere close, it belongs on my watchlist). The company has hiked the dividend every quarter since going public, and the most recent hike was an impressive 10% increase to $0.55. As a relatively young public company, AFCG doesn’t have a long record of dividend increases like some other REITs, but I have been impressed with the size of the dividend increases.

If you assume that the quarterly dividend will be frozen at $0.55 for 2022, shares yield 11.4%. If you think the pattern of dividend hikes will continue, the forward yield could be 12% or higher. I have chosen to reinvest dividends, but investors that want to start recouping their original investment can get back a significant chunk in dividends in one year. Things could change based on regulatory changes, but I think the risk/reward is skewed to the upside and the huge yield is likely to put a floor on the stock.

Conclusion

In my last article, the title called AFCG a speculative deep value pick. That still holds true, but the company gets less speculative for long term investors each time they raise the dividend. The loan portfolio continues to grow, and the valuation is very cheap relative to the growth. The company has used equity issuances to grow, and the external management isn’t ideal, but I think the potential reward greatly outweighs the risks. Investors looking for the best of both worlds with a 11.4% current yield and impressive dividend growth might want to consider a starter position in AFCG.

This article was written by

BeanKounter Capital profile picture
4.16K Followers
CPA and former Big 4 auditor. I break down investments in qualitative and quantitative terms, and I look for investments that will compound my money over the long term.

Disclosure: I/we have a beneficial long position in the shares of AFCG either through stock ownership, options, or other derivatives. 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.

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