Updated on May 28th, 2021 by Bob Ciura
Horizon Technology Finance (HRZN) has a current dividend yield of more than 7%. Horizon’s high dividend yield makes it extremely attractive at first glance. The S&P 500 Index, on average, offers just a ~1.4% 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 54 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 very near the top of the list of monthly dividend stocks, a group that includes many other high-yield securities like REITs and other BDCs.
This article will discuss Horizon’s business model and whether it is an appealing stock for income investors.
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
- Healthcare Information & Services
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 technology group, but even within that group, 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 March, Horizon had a net asset value of $11.07 per share. The share price currently trades at a premium to net asset value.
Horizon has a sound investment philosophy. It also has a high-quality loan portfolio, that should provide the company with growth going forward.
On April 27th, 2021, Horizon released its Q1 results for the period ended March 31st, 2021. Total investment income grew by 31% YoY to $13.2 million. This was due to growth in interest income on investments resulting from an increase in the average size of the debt investment portfolio. Net investment income per share (ISS) grew to $0.31, 19% higher compared to Q1 2020.
The mismatch in growth to the total income 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 $11.07, compared to $11.02 in the previous quarter, as Horizon earned more than what it paid out in distributions.
In fact, after paying its monthly distributions, Horizons undistributed spillover income as of March 31st was $0.33 per share, indicating a considerable cash cushion.
The portfolio remained relatively stable, holding 67 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 $0.10. We continue to expect FY2021 ISS/share of $1.25.
Horizon also has a growing and enormous addressable market.
Source: Investor Presentation
Horizon sees a $16 billion addressable market against its current portfolio of $380 million. This should provide a wealth of opportunities for Horizon, and it can therefore select the best opportunities in the coming years.
Horizon currently pays a monthly dividend of $0.10 per share. The annualized dividend payout of $1.20 represents a yield of 7.3%, based on Horizon’s current price. This demonstrates why BDCs are a popular investment for income investors, and 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 2021 is expected to reach $1.25 per share, which equates to a payout ratio of 96%. This is an improvement from 2020, when the payout ratio exceeded 100% of NII-per-share, as the coronavirus pandemic caused 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 success from its investing strategies, the dividend could be maintained. To that end, Horizon did maintain its dividend payments throughout 2020 and so far in 2021.
The company’s competitive advantage lies in its expertise to identify 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 $1.20 annually for the foreseeable future.
However, any BDC has 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 occurred in 2016.
High dividend yields are often a sign of elevated risk. In this case, there is considerable risk that Horizon’s dividend could be reduced in the future if its investment income deteriorates, which could 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 condition, which support net investment income and therefore, the dividend.
Horizon could be an attractive high dividend stock for income investors thanks to its 7.3% dividend yield, with the acknowledgement that the dividend could be at risk in a business downturn.