Updated on July 7th, 2021 by Bob Ciura
Exchange-traded fund and mutual fund providers have consolidated in a big way in recent years. The number of these independent companies has dwindled via mergers, and the ones that are left are generally not thought of as income stocks.
U.S. Global Investors, Inc. (GROW) pays a dividend, but with a low yield of just 1% that is well below the S&P 500 average yield. On the plus side, the company pays its dividends monthly, instead of quarterly or semi-annually. This allows for more frequent payments for those investors that purchase stocks primarily for income.
U.S. Global Investors is one of only 51 monthly dividend stocks. You can download our full list of monthly dividend stocks (along with price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the link below:
U.S. Global Investors’ yield of just 1% is unattractive from an income perspective, even if it is paid monthly. In addition, we see future growth as challenging. And while the dividend is likely safe for now, deteriorating earnings could result in a payout cut or suspension in the future.
This article will analyze the investment prospects of U.S. Global Investors in greater detail.
U.S. Global Investors began more than 50 years ago as an investment club. Today, it is a publicly-traded registered investment advisor that looks to provide investing opportunities in niche markets around the world. The company provides sector-specific exchange-traded funds and mutual funds, and recently moved into cryptocurrencies. U.S. Global Investors produces less than $4 million in annual revenue, and has a market capitalization of just $91 million.
The company has a number of niche products in its portfolio of offerings, with the breakdown at roughly two-thirds in emerging markets and natural resources, and the balance in US equity and fixed income products. In addition, U.S. Global Investors’ customer base is almost entirely retail investors.
Retail investors tend to move money in and out of products more often than institutional investors, so we see this as hindering future growth, in addition to making results more volatile.
Indeed, assets under management have been somewhat volatile, but have moved decidedly in the wrong direction over the past three years. U.S. Global Investors is not unique among asset managers in seeing volatile AUM, but its very small scale and negative trend in AUM is concerning from our perspective.
In the 2021 first quarter, total operating revenues increased approximately 23% quarter–over–quarter. Net income came in at $14.2 million, compared to $1.6 million net loss year–over–year. Average AUM for the quarter grew to $4.0 billion, up by 630% from the same quarter a year ago.
The company also reported net working capital of approximately $14.1 million, with cash and cash equivalents of $9.5 million and $41.4 million in securities at fair value which added to the company’s adequate liquidity to meet its current obligations.
We see U.S. Global Investors as struggling to grow in the coming years. We expect low earnings growth of 2%-3% annually for the next several years.
This isn’t a new phenomenon, however, as the company has struggled for years with profitability. The company has investments of its own that produce fairly sizable gains and losses in any particular quarter, including its investment in HIVE Blockchain Technologies (HVBT).
HIVE is a cryptocurrency miner, meaning it has supercomputers that mine Bitcoin, Ethereum, and others. U.S. Global Investors has increased its investment in HIVE. During the first quarter, U.S. Global Investors purchased convertible securities comprised of 8.0% interest-bearing unsecured convertible debentures, with a principal amount of $14.3 million maturing in January 2026.
It also purchased 5 million common share purchase warrants, which expire in January 2024. The principal amount of each debenture is convertible into common shares at a conversion rate of $2.34. As of the end of the 2021 first quarter, the investments were valued at approximately $29.1 million.
This investment will help bolster results, but investors should keep in mind that a huge investment in a company that mines cryptocurrencies is far from a safe long-term strategy.
While certain quarters will show large investment gains for U.S. Global Investors, we see the long-term business model as challenged. We therefore do not believe the growth prospects of this company are particularly enticing.
U.S. Global Investors has paid its dividend on a monthly basis for more than 11 consecutive years, which is a decent track record. At the current payout of $0.06 per share annually, the stock yields 1%. On a yield basis, U.S. Global Investors is far from attractive, although the company doubled its dividend payout in 2021.
The problem is that with an extremely murky outlook for earnings growth, we believe dividend growth will also be very difficult to come by. On the plus side, with a clean balance sheet, we believe it can continue to pay the dividend for some time, if it were to choose to fund it with cash on hand rather than earnings.
The company’s cash and equivalents balance has declined over time as well, but U.S. Global Investors has enough cash and short-term bonds on the balance sheet that it could theoretically pay the dividend for years without earnings. Thus, we believe the payout is safe at this point.
U.S. Global Investors has a tough road ahead of it. The company has to compete with other asset managers that are many times its size in an industry where scale means pricing power. This company has no scale or pricing power, and is seeing rising operating costs.
Investors should always be mindful of unique liquidity risks and other factors when buying micro-cap stocks that have market caps below $100 million.
The investment in HIVE is a potential growth catalyst with immense upside potential, but is also very risky. Given this, and the fact that the dividend yield is so low, we think investors should avoid this stock. There are many better choices in terms of payout growth, current yield, and dividend growth.