These 3 Small Cap Financials Show Dividend Growth

Published Tue, 08 Dec 2015 18:00 CET by

The theory holds that small caps thrive when the dollar becomes stronger, because smaller companies generate most of their revenues within the U.S and they rarely do business abroad. Given this, small caps offer investors the opportunity of realizing extremely high returns, while accepting a higher level of risk. Yet, by recognizing the potential of these companies, investors can realize remarkable long-term profits as sustainable growth keeps on making these companies more attractive.

There are several small-cap stocks in the financial industry that have delivered strong results in the last quarter or have managed to anticipate the volatility of the markets and sustain dividend growth. This article discusses three small cap companies that trade in the financial industry. All three companies have identified areas of growth and have managed to capitalize on market opportunities for high risk-adjusted yields. Therefore, they should be considered by dividend investors.

Ellington Financial, Manhattan Bridge Capital and United Development Funding IV YTD Stock Performance Graph
Ellington Financial (NYSE: EFC) is a Connecticut-based specialty finance company operating in the mortgage sector through its subsidiary Ellington Financial Operating Partnership LLC, across the United States. Ellington Financial acquires and manages residential mortgage-backed securities (RMBS), commercial mortgage-backed securities, subprime residential mortgage loans, manufactured housing, Alternative A-paper, as well as commercial real estate debt and mortgage-related derivatives. Additionally, Ellington Financial holds investment positions in corporate and private debt and equity securities and derivatives, consumer loans and asset-backed securities.

Weak Q3 2015 Results: the significant tightening in swap spreads and the widening spread in the fixed income securities has had a negative impact on Ellington Financial’s credit and RMBS strategies as well as in the company’s Q3 results. The emerging economies, and particularly China, went through a market backdrop, whereas in the U.S. market, the Fed’s decision to put the interest rates on hold was pretty discouraging for the market and consequently for Ellington Financial. More specifically, Ellington Financial’s revenues declined almost 20% YoY to $22.5 million from $27.0 million in Q3 2014, while gross margin declined to 71% from 78% as a result of a very high level of volatility during the year. On the same page, net income dropped down to $3.9 million from $12.95 million in the same quarter last year, a 70% decrease YoY. On a positive note, operating income increased 39% YoY to reach $17.5 million from $12.6 million in Q3 2014.

Future Dividend Outlook: Ellington Financial polished its capital management strategy by establishing a new dividend level while the company is in the process of realigning its portfolio. Currently, Ellington Financial delivers an annualized dividend of $2.00, yielding 11.76% at a payout ratio of 174%. The company’s management believes that once portfolio realignment is completed, it will create a stream of inflows that will sustain the new dividend level. Additionally, the company seeks to establish a payout of over 100% for FY 2015 in order to deliver long-term value to its shareholders. To that end, Ellington Financial will continue to effectively manage its investment portfolio and capitalize on market opportunities for high risk-adjusted yields and growth potential. Analysts forecast an average EPS of $1.96 for the next three years, up by 70.4% from the current EPS of $1.15, and an average earnings growth of 5.47% up to 2020.

Manhattan Bridge Capital (Nasdaq: LOAN), the New York-based real estate finance company specialized in the origination, servicing and management of first mortgage loans in the United States. The company provides real estate investors with short-term, secured non-banking loans for acquisition, renovation, rehabilitation, or improvement purposes related to properties in the New York metropolitan area.

Strong Q3 2015 Results: During the third quarter, Manhattan Bridge Capital has managed to achieve strong results and meet shareholders’ expectations. By delivering constant growth, the company seeks to continue operating loans that could sustain a safe equity to leverage ratio. More specifically, revenues climbed to $1.03 million, up 33.8% YoY from $0.77 million in Q3 2014, whereas operating income and net income reached $0.64 million, up 48.8% YoY from $0.43 million in the same quarter last year due to an increase in lending activity. On the downside, operating expenses increased 11.4% to $0.39 million from $0.35 million in Q3 2014.

Dividend History: Manhattan Bridge Capital delivers an annualized dividend of $0.34, yielding 7.91% at a payout ratio of 109.7%. The company’s dividend growth since 2003 is 194.1%, from quarterly DPS $0.25 to quarterly DPS $0.085.

Future Outlook: Manhattan Bridge Capital’s primary business objective is to further grow its portfolio while preserving its capital in a way that could provide long-term dividend growth to its shareholders. This objective is expected to be achieved by a careful selection of secured first mortgages on residential real estate in the New York metropolitan area and by effective portfolio management that could generate risk-adjusted returns at all market conditions.

Name Price ($) 52 wk low 52 wk high 52 wk low % 52 wk high % Market Cap ($ b) P/E D/E Beta Payout Ratio
Ellington Financial 16.86 16.86 21.67 -0.82% -22.20% 568.09 14.77 0 0.45 174%
Manhattan Bridge Capital 4.32 2.98 4.78 74.97% -9.62% 31.10 13.61 0 0.27 110%
United Development Funding IV 17.18 15.93 19.37 7.85% -11.31% 535.24 9.47 0.34 0.32 89%

United Development Funding IV, L.P. (Nasdaq: UDF) is a Texas-based real estate investment trust, engaging in the origination, purchase, participation and holding of investment secured loans for the acquisition and development of real property across the United States. United Development Funding engages in single-family residences or mixed-use master planned residential communities and it holds investment positions in land for home construction. In addition, it provides credit facilities to real estate developers and home builders and participates in securitized real estate loan pools and state-, county-, or municipal-secured discounted cash flows.

Q3 2015 Financial Highlights: In spite of the volatile market environment, United Development Funding has managed to grow its balance sheet, increase the leverage on its portfolio and achieve earnings growth. Particularly, in the last quarter, the company has performed very well in the commercial mortgage section, outperforming competitive REITS and sustaining dividend growth in the coming quarters. Compared to Q3 2014, United Development Funding’s results are as follows:

  • Revenues $27.3 million, up 18.5% YoY from $23.04 million in Q3 2014
  • Operating income $14.3 million, up 7% YoY from $13.4 million in Q3 2014.
  • Net income $14.3 million, up 7% YoY from $13.4 million in Q3 2014.
  • Operating expenses $13.0 million, up 34.4% YoY from $9.7 million in Q3 2014.
  • Annualized dividend per share $1.64, yielding 9.40% at a payout ratio of 89.1%.

Future Outlook: During the first nine months of 2015, United Development Funding has not identified any slowdown of lot purchases in their clients’ portfolios and they strongly believe that they will continue to develop and sell all finished projects to homebuilders across Texas. Although the challenges of securing land and capital to sustain development remains, the company sees growth opportunities in Texas, Florida and Carolina, i.e. in regions where the housing activity is in an upward trend.