Sure Dividend

High-Quality Dividend Stocks, Long-Term Plan
Member's Area

Monthly Dividend Stock In Focus: Horizon Technology Finance


Updated on September 26th, 2024 by Felix Martinez

Horizon Technology Finance (HRZN) has a current dividend yield of more than 12.9%. Horizon’s high dividend yield makes it extremely attractive at first glance. The S&P 500 Index, on average, offers just a 1.3% 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 78 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:

 

Click here to instantly download your free spreadsheet of all 78 monthly dividend stocks now, along with important investing metrics.

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 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.

Growth Prospects

In its second-quarter report for 2024, Horizon reported net investment income (NII) of $12.9 million, or $0.36 per share, down from $16.1 million, or $0.54 per share, in the same period last year. The company’s investment portfolio stood at $646.9 million, with a net asset value of $328.8 million, or $9.12 per share, as of June 30, 2024. Horizon also highlighted a 15.9% annualized portfolio yield and raised $17.1 million through its at-the-market offering program.

Horizon’s second-quarter operating results included total investment income of $25.7 million, down from $28.1 million in the prior year, primarily due to lower interest income from its debt investment portfolio. Total expenses increased slightly to $12.4 million, driven by higher interest expenses. The company’s net realized gains on investments were $2.5 million, compared to a significant loss of $16.5 million in 2023. However, the quarter saw a net unrealized depreciation of $24.5 million in its investment portfolio, compared to a slight appreciation of $0.6 million last year.

Horizon’s portfolio consisted of 54 secured loans with a total value of $609.1 million, alongside equity and warrant investments in 103 companies valued at $37.8 million. Despite challenges, Horizon secured a $100 million senior credit facility, bolstering its balance sheet and positioning itself for portfolio growth in the latter half of 2024. With five debt investments classified under its highest-risk rating, Horizon aims to focus on quality investments and maximize its net asset value moving forward.

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 $26 billion addressable market against its current portfolio. 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 $1.35 represents a yield of 12.9%, 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 2024 is expected to reach $1.45 per share, which equates to a payout ratio of 92%. 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 $1.35 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 12.9% 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.

And see the resources below for more compelling investment ideas for dividend growth stocks and/or high-yield investment securities.

Thanks for reading this article. Please send any feedback, corrections, or questions to support@suredividend.com.



articles
Golden Rule Commitment
contact - legal - testimonials