![]() NEWT's Primary Factor Regarding Setting an Appropriate Dividend Per Share Rate - Intend to Cover the Company's ADR with Net ICTI If this were to occur, all of NEWT's net ICTI would be subject to taxation at regular corporate tax rates at the company level. ![]() If NEWT fails to comply with this provision, the company will be declassified as a RIC per the IRC. This is also known as the spillback provision. However, NEWT must distribute its remaining net ICTI through declared dividends prior to the filing of its tax return from the previous year. It is allowed to carryover its net ICTI into the following year. Regarding NEWT's ADR, the company has an additional option available if it fails to distribute 90% of its net ICTI within a given year. When NEWT's ICTI and net capital gains are combined, this comprises the company's net ICTI, which is also known as its annual distribution requirement ("ADR"). This is an important (and positive) trend for readers to understand. In fact, NEWT has never had a capital loss carryforward balance dating all the way back to the company's conversion to a BDC back in 2014. The other BDC peer that I currently cover that did not have a capital loss carryforward balance as of was Main Street Capital Corp. While most sector peers continue to have a material capital loss carryforward balance from prior years, NEWT currently is one of the few BDC exceptions. Net capital gains consist of realized short-term net capital gains in excess of realized long-term net capital losses for each tax year. Next, one would need to determine NEWT's net capital gains for the specified time period. ![]() Several book-to-tax adjustments need to be determined to properly convert NEWT's earnings per share ("EPS") figure to the company's ICTI. If NEWT qualifies to be taxed as a RIC, the company avoids double taxation by being allowed to take a dividends paid deduction at the corporate level. This is a very similar taxation treatment when compared to a real estate investment trust ("REIT") entity. As a RIC, NEWT is required to distribute to shareholders at least 90% of the company's ICTI and net capital gains (in excess of any capital loss carryforward balance if applicable) in any given tax year in order to be eligible for the tax benefits allowed in regard to this type of entity. There is one specific provision which pertains to NEWT's dividend sustainability that should be discussed. These requirements are beyond the scope of this article and will not be mentioned again. To continue to qualify annually as a RIC, the IRC requires NEWT to meet certain "source of income" and "asset diversification" requirements. Discussion of NEWT's RIC Classification per the IRCĪs a BDC, NEWT elects to be treated as a RIC under Subchapter M of the IRC. This includes thirteen other BDC peers I currently cover (ultimately based on reader requests and my professional workload). In the future, I will cover other sector peers' IRC metrics via similar articles. ![]() From reading this article, investors will better understand how a RIC per the IRC comes up with the company's current dividend per share rate, and specific signs when an impending increase or decrease should occur. Understanding the tax and dividend payout characteristics of NEWT will provide investors with an overall better understanding of the business development company ("BDC") sector as a whole. I will also provide my personal projection regarding the company's annual dividend per share rate for 2018-2019 (2018's projection slightly "de-couples" from management's current guidance). At the end of this article, there will be a conclusion based on the results obtained from TEST 1, TEST 2, and TEST 3 about the dividend sustainability of NEWT. The third test will focus on NEWT's investment pipeline (which directly leads to realized/capital gains) and be termed "TEST 3". These two tests will be termed "TEST 1" and "TEST 2". The first two tests will focus on NEWT's net investment company taxable income ("ICTI") and the company's undistributed taxable income ("UTI"). This analysis will be provided after a brief overview of its regulated investment company ("RIC") classification per the Internal Revenue Code ("IRC"). The focus of this article is to provide a detailed analysis with supporting documentation (via three tests) on the dividend sustainability of NEWT. For readers who just want the summarized conclusions/results, I would suggest to scroll down to the "Conclusions Drawn" section at the bottom of the article. I have performed this analysis due to the continued number of readers who have specifically requested such an analysis be performed on NEWT (since I have not written a "focus" article on this company since 2016). Author's Note: This article is a detailed analysis of NEWTEK Business Services' ( NASDAQ: NEWT) dividend sustainability.
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