Today, companies have to radically revolutionize themselves every few years just to stay relevant. That’s because technology and the Internet have transformed the business landscape forever. The fast-paced digital age has accelerated the need for companies to become agile. − Nolan Bushnell
Newtek Business Services (NEWT) has been quick to respond to COVID-19’s devastating impact on the economy. It immediately stopped the forward movement in the pipeline of its mainstay SBA 7(A) loans and started participating in the federally guaranteed PPP program. Aided by the income from the PPP program, NEWT’s reported a good set of numbers in Q2 2020, bumped up its NAV to $15.66, and forecasted an NII in the range of $180 to $230 million for 2020.
However, the company’s estimates of the NII range are based on the assumption that the PPP program will continue. As I write this post on August 8, 2020, talks have broken down between the Democrats and the Republicans, and it’s unclear what shape and form the new PPP will take. However, chances are high that it will be as effective as the one that just got over.
Let’s now check how NEWT is coping with the situation and how its prospects are shaping up in 2020-21:
NEWT: Prospects 2020-21
1. The CARES Act provides that it will pay principal and interest on existing/current SBA 7(A) loans for six months. These are actual cash payments and not mere provisions in the books. The company estimates that this program will continue in Q3 2020 and that its clients will receive another three months of principal and interest. The infusion will help boost NEWT’s cash balance.
2. The company also shifted from SBA 7(A) loans to the new PPP program to capitalize on the COVID-19 opportunity. In Q2 2020, NEWT funded $1.11 billion worth of PPP loans and earned $34.7 million in origination fees. The company originated 2 years of loans in a space of just 4 weeks, thanks to the PPP program.
Source: Seeking Alpha
It looks great but investors should realize that the origination fees formed 74% of the company’s Q2 2020 revenues of $46.7 million. If the virus refuses to die down and the government decides to end the PPP program, the company’s income statement will take a hit – and we don’t know when that will happen. Till the PPP program is on, NEWT will continue raking in the fees.
3. As of June 30, 2020, NEWT owns $419.49 million worth of SBA unguaranteed non-affiliate investments (p. 1). The company has been successful in improving its accrual loan currency rate to about 94%, which is a happy situation to be in, given that we are operating in uncertain times that are oozing with bankruptcies.
Image Source: NEWT Q2 2020 Presentation (Slide #16)
4. The company is selectively restarting its 7(A) business in Q3 2020. The goal is to focus on small businesses that are benefitted by the disruption – for example, RV parks, marinas, boat dealers, pest control companies, staffing companies, etc.
5. Barry Sloane, NEWT’s CEO, made an interesting comparison in the company’s Q2 2020 earnings call. He brought up the matter of fintech companies like OnDeck Capital, Kabbage, and Lendio merging into one company at a valuation of $90 million.
He compared the merged company’s online lending product with the NEWT’s, which has managed credit and reported on credit risks for more than 17 years across 50 states. Not that it will make any difference to its bottom-line immediately, but NEWT’s product does seem to be pregnant with potential.
6. NEWT now has a 51% stake in POS on Cloud which makes it the owner of a branded POS system that can process payments and integrate with e-commerce websites. It currently integrates with all food delivery services such as Uber Eats, Grubhub, DoorDash (Slide #26). It also has a time and attendance feature that integrates with NEWT’s payroll solution.
The company plans to market this product going forward and the prospects are looking good.
7. With a $2.29 dividend payout in the last 12 months, NEWT offers a monster dividend yield of 11.89% at its current price of $19.58 as of August 8, 2020.
Source: Seeking Alpha
The company has been a consistent dividend payer that has not skipped dividend in the last 5 years. Its dividend has grown at a robust 18.04% year over year. The dividend rate going forward should be steady because the government and Fed are committed to supporting the economy no matter what it takes, and NEWT will get opportunities to participate in such programs and earn fees and interest.
8. CEO Barry Sloane also said in the company’s Q2 2020 earnings call that a move was afoot to allow institutional investors to buy up to 10% of their total assets in BDCs. If this were to go through, it would be a game-changer for BDC’s stock valuation.
NEWT’s portfolio is de-risked and diversified and its average loan size is just $179,000 spread across geographies. Even then, the company’s management team is aware that it will take a hit going forward and it has marked down the portfolio.
To me, NEWT looked good as a dividend play even during the Pre-COVID-19 era. It’s looking better now because it’s clear that businesses are not going to recover until the virus is contained, and the government and its agencies will do everything to prop up the economy. NEWT can cash in on federally guaranteed loans and rake in the cash and also lend to businesses that will do well despite the virus. It’s a win-win situation for the company going forward. The only caveat here is about the timing and the quantum of the new PPP program which is stuck in political wrangling.
Another huge plus that can happen is that the regulators may allow institutional investors to buy stakes of BDCs. That’d be huge.
Considering all pros and cons, I am bullish on NEWT in the long run as a dividend play with lots of momentum potential.
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