Is Fidus Investment’s 8.5% Yield Sustainable?

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Fidus Investment (Nasdaq: FDUS) is an under-the-radar business development company (BDC) that yields more than 8%. The Evanston, Illinois-based company provides debt and equity financing to American companies that need cash for acquisitions or recapitalization.

Its portfolio includes…

  • $39 million in debt and equity in insulation manufacturer GreenFiber
  • $55 million in debt and equity in FDS Avionics, which makes high-definition displays for airplanes
  • $18 million in debt, equity, warrants and preferred stock in human resources software company Acendre Midco.

Fidus’ quarterly dividend is $0.41, which gives the stock an 8.5% yield. But it also often pays special dividends.

For example, in the second quarter, Fidus paid investors an additional $0.29 per share. In the first quarter, shareholders received an extra $0.25 per share.

To determine the safety of a company’s dividend, I look at both the regular quarterly dividend and the total dividend, including special payments.

As far as the quarterly dividend goes, in 2022, the company paid out $1.44 per share. At the end of the year, there were 24.5 million shares outstanding, which means Fidus paid out approximately $35.3 million in quarterly dividends.

It generated $46.5 million in net investment income for the year, giving it a payout ratio of 76%. I’m generally comfortable with BDCs paying out all of their net investment income in dividends. But not more than 100%.

This year, the quarterly dividend has increased to $0.41 per share. There were 24.8 million shares outstanding as of the end of the first quarter, which means Fidus will pay shareholders about $40.7 million.

There are no net investment income estimates for this year, but earnings and revenue are projected to grow 25%, so we’ll assume net investment income is going to rise also. Even if net investment income grows only 10%, that should be plenty to ensure that the quarterly dividend can continue to be paid.

However, when you consider all of the dividends the company will pay, the picture isn’t quite as pretty…

In 2022, the company paid shareholders $49.1 million, more than the $46.5 million it generated in net investment income. That’s not good.

This year, Fidus is forecast to pay shareholders $62.2 million, which means net investment income will need to increase by 34% for the company to be able to afford its dividend.

Management cut the quarterly dividend in 2020 from $0.39 to $0.30, so it has only recently gotten back to where it was in 2019.

Fidus should be able to generate enough net investment income to sustain the $0.41 quarterly dividend. But it does not make enough money to afford the total dividend, including the special dividends.

Since the special dividend is variable anyway, there is a very high likelihood of a reduction.

Dividend Safety Rating:
Quarterly dividend: B
Total dividend, including special dividends: D

Dividend Grade Guide

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