Years ago, I was researching New Mountain Finance Corp. (Nasdaq: NMFC) and discovered that a childhood friend’s little brother was the CEO! I still thought of him as the pesky kid bugging us to get in on our pingpong games, but there he was, running a successful and high-yielding business development company (BDC). As a result, I always rooted for him and the company.
My friend’s brother is no longer running New Mountain Finance, but the company still pays a high 12% dividend yield. Let’s see whether that dividend is as solid as my friend’s table tennis skills.
New Mountain Finance primarily lends money to companies with EBITDA (earnings before interest, taxes, depreciation, and amortization) between $10 million and $200 million, and its portfolio spans a wide variety of industries.
Healthcare services is the largest portion at 11%, while enterprise resource planning software makes up 8% and education and consumer services each account for 7%.
Since the company is a BDC, we look at net investment income, or NII, as our measure of cash flow to determine the health of the dividend.
Last year, NII dipped from $240 million to $224 million. Safety Net penalizes companies for declining cash flow, because if it’s the beginning of a trend, it could mean trouble for the dividend. Sometimes, the lower cash flow is a one-off event and not the start of something dangerous. But Safety Net still downgrades the stock’s dividend safety rating by one level as a caution sign.
This year, New Mountain Finance is projected to grow NII to $293 million – its highest amount in years. Should the company deliver anything above $224 million in 2025, its rating will receive an upgrade.
Despite the drop in NII, the good news is that out of the $224 million, New Mountain only paid $147 million in dividends for a 66% payout ratio. This year, dividends paid are forecast to grow to $154 million, but because of the significant expected growth in NII, the payout ratio is projected to fall to 53%, giving the company even more of a buffer.
Here’s the bad news.
New Mountain Finance has cut the dividend four times since 2020, including three times in the last 13 months. (That’s only including the regular dividend, not the special dividend, which the company often issues as well.)
To be fair, the three recent cuts occurred because the company raised the dividend and then had to cut it back. But a management team that is willing to lower the dividend will likely do so again.
The current $0.32 per share quarterly dividend comes out to a yield of over 12%. As long as New Mountain generates the expected amount of NII, it can afford its dividend. But the track record of regular dividend cuts means that investors can never really feel like the dividend is safe.
Dividend Safety Rating: F
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