Updated on March 7th, 2023 by Nikolaos Sismanis
Horizon Technology Finance (HRZN) has a current dividend yield of more than 10.4%. Horizon’s high dividend yield makes it extremely attractive at first glance. The S&P 500 Index, on average, offers just a 1.6% dividend yield.
Not only does it have a very high dividend yield, but it also makes its payments each month. Horizon is one of only 84 monthly dividend stocks.
You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter, like dividend yield and payout ratio) by clicking on the link below:
Horizon’s yield is near the top of the list of monthly dividend stocks, a group that includes many other high-yield securities like REITs and other Business Development Companies.
This article will discuss Horizon’s business model and whether it is an appealing stock for income investors.
Business Overview
Horizon Technology Finance is a Business Development Company, or BDC. These are companies that make investments in privately held companies.
Horizon makes its returns via investments in companies through directly originated senior secured loans and, to a smaller extent, capital appreciation potential through warrants.
It provides debt financing to early-stage companies across three industry groups:
- Life Science (42% of portfolio)
- Technology (41% of portfolio)
- Sustainability (12% of portfolio)
- Healthcare Information & Services (5% of portfolio)
Life science companies primarily include biotechnology, medical devices, and specialty pharmaceuticals.
Technology investments are typically made in cloud computing, wireless communications, cyber security, data analytics and storage, internet, software, and more.
Healthcare information includes diagnostics, medical records, and patient management software providers.
A breakdown of Horizon’s portfolio is as follows:
Source: Investor Presentation
The portfolio is heavily weighted in the life science and technology groups, but even within those groups, industries are highly diversified.
In addition, the company has a favorable mix of stable and growing companies, respectively, in its portfolio to provide a mix of growth and safety in its lending.
Horizon views prospective investments through a long-term lens. It invests in companies that have growth potential, strong management teams, superior technology, and/or valuable intellectual property.
As of the end of June, Horizon had a net asset value of $11.47 per share. The share price currently trades at a premium to net asset value per share.
Horizon has a sound investment philosophy. It also has a high-quality loan portfolio that should provide the company with growth going forward.
Growth Prospects
On February 28th, 2023, Horizon reported fourth-quarter results for the period ending December 31st, 2022. Total investment income grew by 36.6% year-over-year to $21.3 million. This was primarily due to growth in interest income on investments resulting from an increase in the average size of the debt investment portfolio and an increase in the base rate for most of the company’s variable rate debt investments. The latter was driven by rising interest rates.
Net investment income per share (NIIPS) grew to $0.40, one cent higher compared to Q4 2021.
The mismatch in growth to the total income and income per share was due to the additional share issuances that took place to fund the company’s portfolio expansion. Net asset value (NAV) per share came in at $11.47, compared to $11.56 in the previous quarter.
In fact, after paying its monthly distributions, Horizon’s undistributed spillover income as of December 31st was $0.68 per share, indicating a considerable cash cushion.
The portfolio remained relatively stable, holding 98 businesses at the end of the quarter. Management reassured investors of dividend stability going forward by declaring its three forward monthly dividends at a rate of $0.11. Based on Horizon’s current portfolio composition, we forecast FY2023 NIISS of $1.45.
Horizon also has a growing and enormous addressable market.
Source: Investor Presentation
Horizon sees a $49 billion addressable market against its current portfolio of $686.5 million. This should provide a wealth of opportunities for Horizon, and it can therefore select the best opportunities in the coming years.
Dividend Analysis
Horizon currently pays a monthly dividend of $0.11 per share. The annualized dividend payout of $1.32 represents a yield of 10.4%, based on Horizon’s current price. This demonstrates why BDCs are a popular investment for income investors, particularly one that has a yield as high as Horizon.
However, abnormally high dividend payouts can be reduced if the issuing company encounters financial difficulty. That said, Horizon still offers a high yield, which could be very appealing for income investors.
Net investment income for 2023 is expected to reach $1.45 per share, which equates to a payout ratio of 91%. The payout ratio has improved notably since 2020, when the payout ratio exceeded 100% of NII-per-share. This was due to the coronavirus pandemic causing a decline in the portfolio results.
If investment income declines in the future, the dividend would be in danger of a reduction. On the other hand, if the U.S. economy avoids a recession and Horizon continues to see satisfactory investment spreads, the dividend could be maintained and even grow. To that end, Horizon increased its dividend last year.
Related: 3 Reasons Why Companies Cut Their Dividends (With Examples)
The company’s competitive advantage lies in its expertise in identifying the most promising companies in risky sectors, which requires professional knowledge and experience beyond finance. So far, this perk has stood solid, as the company’s results have outperformed the rest of its peers, many of which were forced to cut their distribution due to increased market pressure.
In an optimal scenario, Horizon could continue to pay its distribution of $1.32 annually for the foreseeable future. However, any BDC has an increased risk of cutting its distribution, given that it is required to distribute essentially all of its income. Should Horizon’s financial results deteriorate, a dividend cut is certainly possible, as it occurred in 2016.
Final Thoughts
High dividend yields are often a sign of elevated risk. In this case, there is a considerable risk that Horizon’s dividend could be reduced in the future if its investment income deteriorated, which would likely occur in a deep recession.
However, the outlook for Horizon is generally positive. It invests in technology and healthcare, two stable industries with growth potential. The company’s underwriting principles offer high yields and generally safe lending conditions, which support net investment income and, therefore, the dividend.
Horizon could be an attractive high-dividend stock for income investors thanks to its 10.4% dividend yield, with the acknowledgment that the dividend could be at risk in the event of a business downturn.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
- 20 Highest Yielding Monthly Dividend Stocks
- 10 Cheapest Monthly Dividend Stocks
- 10 Safest Monthly Dividend Stocks
- 3 Top ‘Hold Forever’ Monthly Dividend Stocks
And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.
- Dividend Kings: 50+ years of rising dividends
- Dividend Champions: 25+ years of rising dividends
- Dividend Aristocrats: 25+ years of rising dividends and in the S&P 500
- Dividend Achievers: 10+ years of rising dividends and in the NASDAQ
- High Dividend Stocks: 4%+ dividend yields
- Blue Chip Stock: Kings, Aristocrats, and Achievers
- MLPs: List of MLPs and more
- REITs: List of REITs and more
- BDCs: List of BDCs and more