Monthly Dividend Stock In Focus: Eagle Point Income Company

Revealed on July sixteenth, 2021 by Bob Ciura

Month-to-month dividend shares are favored for his or her extra frequent dividend funds in contrast with conventional quarterly dividend payers. Eagle Level Earnings Firm (EIC) is a comparatively new firm that provides shareholders a month-to-month dividend cost.

There lower than 60 shares we cowl that provide a month-to-month dividend. You may obtain our full checklist of month-to-month dividend paying shares (together with essential metrics similar to price-to-earnings ratios, dividend yields, and payout ratios) by clicking on the hyperlink under:

Eagle Level can be a excessive dividend inventory with a yield of greater than 6% primarily based on the present share worth. Contemplating the S&P 500 yields roughly 1.3% proper now, Eagle Earnings inventory gives practically 5 occasions the earnings of the broader market index.

Nonetheless, there are crimson flags to think about as properly. Traders in search of secure earnings must be cautious because of the firm’s elevated payout ratio, which leaves little room for error. For instance, final 12 months the corporate slashed its dividend by ~40% throughout the coronavirus pandemic.

This text will discover Eagle Level enterprise mannequin, potential for development and the corporate’s dividend security.

Enterprise Overview

Based in 2012, Eagle Level had its preliminary public providing on July 23, 2019. Eagle Level is a closed-end funding firm. Which means shares of Eagle Level commerce like all typical fairness, with rising and falling share costs all through the buying and selling day, however the firm is not going to subject further shares.

The corporate will even not repurchase shares. Not like alternate traded funds, Eagle Level is not going to see an inflow of latest capital, which permits the inventory to commerce extra like a person inventory.

Supply: Investor Presentation

Eagle Level lists its main funding goal as producing excessive present earnings. This could attraction to earnings traders as the corporate’s major focus is producing dividends for shareholders. Capital appreciation is the secondary goal.

The corporate primarily invests in junior-debt tranches of collateralized mortgage obligations, or CLOs. Tranches are pooled assortment of securities, usually debt devices, which might be organized by danger or different traits and marketed to traders.

Not like a standard mounted earnings product, similar to debt of a company or municipality, Eagle Level owns collateralized mortgage obligations. Which means the corporate owns the securities issued by a CLO. Eagle Level may additionally make investments as much as 20% of whole belongings in CLO fairness securities and associated securities.

As a result of junk credit standing on most CLO points, that are these rated BBB and under by Commonplace & Poor’s, funds like Eagle Level are extremely dangerous. The decrease the credit standing, the upper probability of default. To assist offset this danger, CLO funds usually distribute the chance by proudly owning all kinds of differing CLOs.

The fund’s portfolio of simply over $120 million is comprised of1,291 mortgage obligors, none of whom accounts for greater than 1.38% of its whole belongings. The typical mortgage maturity of the portfolio is 4.9 years, in opposition to 2.6 years of the average remaining CLO reinvestment interval. The average score on Eagle Level’s loans is B+/B. Eagle Level Earnings Fund was based in 2018, generates round $11 million in internet funding earnings yearly.

Progress Prospects

Whereas there are inherent dangers when coping with debt obligations which might be under investment-grade, Eagle Level does have a number of positives in its favor.

Demand for leveraged loans and CLOs has been significantly larger over the previous few years, however CLOs have grown at a a lot sooner price.

Supply: Investor Presentation

Loans excellent within the U.S. elevated with a compound annual development price, or CAGR, of 6% since 2015. Over that very same time period, CLOs excellent have grown from $427 billion in 2015 to $766 billion final 12 months, which computes to a CAGR of 12%.

CLO demand is way outpacing mortgage demand. That is the place an organization like Eagle Level can discover success. With larger demand for its CLOs, Eagle Earnings may see its enterprise excel and afford to pay larger dividends to traders.

And whereas the speed of default could be larger in lower-rated debt, Eagle Level focuses on CLO debt that’s just below investment-grade. The corporate make investments primarily within the BB-rated debt tranche, which is one spot under an investment-grade credit standing.

From 1996 via Q2 2018, the cumulative default price on BB-Rated CLO Debt was 1.5% (or 0.07% per 12 months). This default price reveals that the speed of default for BB-rated debt is fairly low over the long-term. It’s a riskier enterprise mannequin, however not as a lot as traders would possibly suppose.

Dividend Evaluation

Eagle Level has paid a dividend each month since inception, but it surely has fluctuated from month to month and been lowered a number of occasions. The primary lower was for the second distribution following the IPO which resulted in a 14% decline.

The corporate maintained the identical dividend quantity till decreasing it by 40% for the cost made in April 2020, because of the coronavirus pandemic and the destructive impression on the broader economic system. Serving to to offset this was a particular dividend of $0.38 per share paid in 2020.

And, Eagle Level has slowly returned to dividend development because the U.S. economic system has emerged from the pandemic. The July 2021 month-to-month cost of $0.09 per share was a rise of 6% from the earlier month-to-month payout. At an annualized price of $1.08 per share, Eagle Level inventory yields 6.6%.

Nonetheless, future funds shouldn’t be assumed, because of the inherently danger nature of its enterprise mannequin. With anticipated internet funding earnings of $1.12 per share for 2021, Eagle Level presently has a dividend payout ratio above 90%. This means a excessive degree of danger to the dividend, ought to one other financial downturn happen.

Remaining Ideas

Excessive yielding shares usually include excessive dangers and that’s true for Eagle Level. The corporate focuses on CLOs, which is dangerous by itself, however much more so when the debt is rated under funding grade.

It’s true that BB-rated debt, which Eagle Level prioritizes in its enterprise, hasn’t skilled as many defaults during the last 20 years, however that is nonetheless an space that solely essentially the most skilled and danger tolerant investor ought to contemplate investing.

Eagle Level additionally doesn’t have a really lengthy observe file, making it extraordinarily troublesome to reply how the corporate could carry out in a recession.

The excessive yield above 6% is engaging for earnings traders, however there is no such thing as a assure that the corporate received’t drastically cut back its dividend as soon as once more if its fundamentals deteriorate. Due to this fact, Positive Dividend believes that Eagle Level Earnings Firm is greatest averted by most earnings traders.