NMFC

New Mountain Finance ($NMFC) Trading at Discount After Director's $14M Buying Spree...12.5% Dividend Yield's Promise and Peril

08/12/2025 04:06

New Mountain Finance ($NMFC) is a Business Development Company (BDC) specializing in direct lending and private equity investments to middle-market companies in the United States. With a market cap of $1.06 billion, it targets companies with EBITDA of $10-200 million, deploying $10-125 million per investment, focusing on defensive growth industries like software, healthcare services, and business services. Investors should pay attention now for one clear reason: company director Steven B. Klinsky conducted massive concentrated buying from November to December 2024, investing over $14 million in approximately two months. This represents a substantial scale for individual insider trading, and his purchase price range of $10.68-11.74 closely aligns with the current stock price of $10.23. Notably, these purchases were systematically executed through various trusts and family accounts, suggesting confident investment action rather than routine ceremonial buying. Klinsky is the founder and chairman of New Mountain Capital, a veteran with over 30 years in the private equity industry. New Mountain Capital, which he established, manages $14 billion in assets and serves as NMFC's external manager. His massive buying spree reflects not merely personal investment but deep conviction about the company's long-term prospects. Moreover, CFO Kris Corbett's recent purchase of 750 shares on August 7, 2025, reinforces the positive outlook across management. However, investors must objectively assess NMFC's complex situation. While the company offers an attractive annual dividend yield of 12.5%, its payout ratio of approximately 172% exceeds earnings. Recent quarterly results show net investment income (NII) of $0.32 per share in Q2, down from $0.36 in the prior year, with net asset value (NAV) declining to $12.21 per share from $12.45 in the previous quarter. As a BDC, it maintains high leverage (debt-to-equity ratio of 1.35x), making it sensitive to interest rate fluctuations and credit risks. Nevertheless, NMFC's fundamentals remain solid in some aspects. Ninety-five percent of its portfolio maintains the highest 'green' rating, with non-accrual loans at a low 1.4%. The defensive growth industries it focuses on are relatively less sensitive to economic cycles and feature recurring revenue structures that mitigate credit risks. Additionally, approximately $1 billion in credit facilities provides adequate short-term liquidity coverage. Regarding current stock valuation, NMFC trades at 0.81x book value, representing a discount. The stock plummeted to $8.83 in April 2024 before gradually recovering to the current $10.23 level. This closely matches Klinsky's concentrated buying range, suggesting he found strong appeal at these levels. From a market environment perspective, August 2025 has seen increased volatility due to tariff concerns and disappointing economic indicators. Financial sector and BDCs particularly face ongoing concerns, creating valuation pressure. However, during such periods, confident insider buying becomes even more significant. Positive signals investors should note include active share repurchases ($9.6 million in Q2), dividend protection program extended through 2026, and improved low-cost capital access through a third SBA license. Conversely, warning signs include persistent earnings weakness, high payout ratios, and broadly negative market sentiment toward the BDC sector. Looking at future scenarios, in an optimistic case, Klinsky's judgment proves correct and the stock could recover to NAV levels around $12, potentially delivering over 20% total returns including the 12.5% dividend. The most likely base scenario involves stable dividend-focused returns at current levels. The risk scenario to guard against combines earnings deterioration with dividend cuts, potentially pushing the stock below $9. In conclusion, NMFC balances positive factors of experienced insider conviction and attractive dividend yields against risks of earnings weakness and high leverage. While appealing to dividend-hungry investors, it suits those who can accept BDC-inherent complexity and volatility. Klinsky's massive buying is certainly a positive signal, but investors must remember it doesn't eliminate all risks.