While rising interest rates will hurt sectors that rely on debt for growth or expansion, financial stocks are considered well positioned to benefit as rates increase. Seven investment experts and contributors to MoneyShow.com highlight lesser-known plays in business development, asset management and lending.
Adrian Day, Global Analyst
Ares Capital (ARCC) -- a business development company (BDC) that lends to small and mid-size companies -- saw its net income catch up with the dividend following the higher share count after the American Capital acquisition at the beginning of last year.
For the fourth consecutive quarter, earnings improved, running at $0.39 per share in the last quarter, up from $0.32 a year ago, and are now greater than the dividend payout. If not immediately, we can now look ahead to dividend hikes.
Ares acquired the $2.5 billion American Capital portfolio. It has now received more than $1.5 billion from exits and repayments, with a remaining portfolio of $1.6 billion, including about $1 billion of lower-yielding assets (average yield 6.8%).
Included in the recent tax act that passed Congress were several provisions related to BDCs, including, most notably, allowing leverage to increase from 1:1 debt to equity to 2:1. Ares is under-leveraged now. It wants to maintain its investment-grade rating and will be cautious in increasing leverage.
Although the stock price jumped following the quarterly financial release showing earnings had now climbed above the dividend, it remains inexpensive, trading under book and yielding around 9.3%.
For such a conservative BDC, this is a low valuation. For those who do not own, it can be bought, and we are holding for a justified and anticipated re-rating.
Brett Owens, The Contrarian Income Report
Our buy recommendations boast the 1-2 combination we love -- a generous yield and price upside potential. Ladder Capital (LADR) has retaken the top spot on our buy list after management intentionally let a buyout offer for the company fizzle.
This is great news because Ladder is more valuable to us as an independent firm (and publicly traded income source). Thanks to its recent price pullback, the shares now yield 9.1%.
Ladder has a nuanced business model that confuses many investors and money managers. But at heart, it's a commercial mortgage lender. The more loans it writes, the more money it makes. Its weighted average loan-to-value (LTV) ratio is a conservative 67%, which means they have a sizable 33% equity cushion again real estate price declines.
Contrast this with your average homebuyer who has, at most, a 20% equity cushion via his or her down payment. And in most cases, as we saw during the housing crisis, it's much less! This is A-1 credit quality.
Ladder's dividend is well covered by profits, too. Its core earnings-per-share (EPS) of $1.54 for fiscal 2017 is plenty to pay investors their $1.26 per share in yearly dividends. The firm's primary asset is the expertise of its senior management team, which averages 28 years of industry experience.
Their interests are well aligned with ours, thanks to their significant skin in the game. Insiders own $199 million of equity -- about 12% of the firm's $1.5 billion market cap.
It was in their best financial interest to let this unsolicited buyout offer die on the vine. Why would they trade in this cash cow? Why would we? Let's lock in 9%+ on Ladder while it's on sale.
Steve Mauzy, High Yield Wealth
We have found a new opportunity in a dividend-growing money management company -- Westwood Holdings Group (WHG) . The firm focuses on the institutional and high-wealth markets.
Of its $24.2 billion in assets under management (AUM), 60% is derived from institutional clients. These include corporate retirement plans, public retirement plans, endowments and foundations. Institutional separate account minimums vary by investment strategy and generally range from $5 million to $25 million.
Westwood Holdings' AUM growth was impressive last year. AUM grew 14% year over year. Growth of AUM matters. The more assets that are managed, the more fees are collected for managing the assets. As asset growth goes, so goes company revenue.
The dividend is an obvious attraction. The annual dividend was recently raised to $2.72 per share from $2.48, a 9.8% increase. The latest increase lifts the dividend yield to around 4.7%. This is a highest starting yield we've found for a proven dividend grower.
Westwood Holdings Group shares are cheap. This is evinced by the dividend yield. The yield wasn't this high during the 2008 market correction. It was higher only in 2016 when similar concerns of rising interest rates and market correction spooked investors. Investors were irrationally fearful. Westwood Group Holdings shares rallied 60% over the subsequent 18 months.
Richard Moroney, Dow Theory Forecasts
In the March quarter, Apollo Global Management (APO) reported an economic net income loss of $0.30 per share, versus a gain of $0.82 in the year-earlier period. The consensus called for a loss of $0.11.
A leading alternative asset manager, Apollo's results were hurt by unrealized losses in its private-equity business. Management fees rose 8%, and distributable earnings (a measure of cash profits available for stockholders) were a healthy $191 million.
On March 30, assets under management totaled $247 billion, up 25%. The company, which pays a variable dividend based on distributable earnings, declared a quarterly per-share dividend of $0.38, payable May 31.
Apollo traded higher after the report, partly because it said it is considering converting to a corporation from a partnership. The stock is rated a Buy.
Harry Domash, Dividend Detective
Private equity investors are a hot category and we're adding Blackstone Group (BX) to our non-energy partnerships portfolio. The company is one of the largest global investment managers.
Investment segments include private equity (buyouts, etc.), real estate (equity & debt), hedge funds, and debt (collateralized loans, leveraged senior debt, etc.).
Distributions vary with quarterly distributable cash flow. Current distribution yield, based on its last four payouts, is 7.9%. In addition, we expect around 8% annual distribution growth.
Douglas Hughes, Bank Newsletter
Bank stock investing is about the safest sector you can find in today's high-priced world. Oppenheimer Holdings (OPY) is a great idea with low downside risk. This is still the cheapest investment bank around based on a price to book, P/E or any measure you want to use. It also has a super smart CEO running the shop.
The company recently reported one of its best ever quarters. They blew away earnings estimates by 50% to the upside. That's the third quarter in a row that they exceeded estimates. They are printing money since short-term rates have jumped the past nine months and still climbing. They also pay a small cash dividend recently yielding 1.6%.
The company even bought back 450,000 shares at $15.75 and still have 600,000 shares left on the open buyback. With the stock still below tangible book and tons of cash, I am sure they will buy back shares this year, very soon. We consider this a takeout target. Keep it until it hits $40-plus on fundamentals or $45 or more in a deal.
Bryan Perry, Cash Machine
TriplePoint Venture Growth BDC (TPVG) , a business development company, reported first-quarter earnings of $7.9 million.
The company reported it had net income of $0.45 per share. Earnings adjusted for investment gains were $0.34 per share -- a penny ahead of Street estimates.
The investment company that targets technology, life sciences and other high-growth industries reported revenue of $12.6 million in the period.
Debt investments funded on average annualized portfolio yield of debt investments for the first quarter was 14.0%. As of March 31, 2018, the company held 66 debt investments with 21 companies, and 50 warrant and equity investments with 41 companies.
I also want to add asset manager AllianceBernstein Holding LP (AB) to our high-yield conservative model portfolio. AllianceBernstein is a multi-faceted company managing roughly $560 billion. The firm invests in public equity, fixed income and alternative investment markets across the globe.
The firm also provides research services to its clients, which include investment companies, pension and profit sharing plans, banks and thrift institutions, trusts, estates, government agencies, charitable organizations, individuals, corporations and other business entities.
For the fourth quarter of 2017, the firm blew past earnings estimates by 29% and declared a fat distribution of $0.84 in the process. I believe the company is going to keep that winning streak going for 2018 and into 2019.
Because quarterly distributions vary as to profits, I take the trailing four quarterly distributions and divide that sum by the stock's price. This exercise produces a trailing annual payout of $2.30 per share and an 8.7% current yield. The stock is also on a nice technical uptrend.
AllianceBernstein was a holding in our model portfolio back in 2013 and we booked a 29% total return over a span of 19 months. I think we can see that kind of return again by the end of 2019.