CION Investment: Negative Growth Could Hinder Returns (NYSE:CION)

CION Investment (NYSE:CION) performed exceptionally in 2023 given its 32% total return compared to S&P 500 return of 24%. However, 2024 could be a challenging year for the business development company because its net investment income is likely to drop year over year. Moreover, the significant amount of debt maturities in 2024 and 2025 could also negatively impact the company’s ability to invest in growth opportunities. Therefore, I maintain my hold rating on CION stock.

Dividend Is Stable But Growth is Questionable

In my previous article, I raised concern over CION’s ability to sustain financial growth over the long-term. The significant decline in its income in the final quarter of 2023 vindicated my opinion. Its investment income of $60 million in the December quarter was significantly below $67 million in the previous quarter. In addition to low income, the high interest expense on debt obligation also negatively impacted its net investment income. In the December quarter, its net investment income per share was $0.40 compared to $0.55 per share in the previous quarter. The alarming factor is that the declining trend is likely to continue in the short to mid-term, which could have a negative impact on its dividend growth and share price upside potential. Wall Street expects its quarterly net investment income to hover around $0.40 to $0.42 per share throughout 2024. For the full year, the net investment income is expected in the range of $1.65 per share, down from $1.92 per share in the previous year.

Negative growth means CION’s dividend coverage ratio will decline significantly even if the company sustains its current dividend distribution. Last year, it paid $1.61 per share in dividend, which includes regular, supplemental and special dividend. With expectations for $1.65 per share in annual investment income in 2024, its current dividend payout looks sustainable. However, there is low room for CION to offer a higher cash return in 2024 compared to last year. In fact, the risk of dividend coverage ratio falling below 100% is also high over the long term due to the impact of rate cuts on its 80% floating rate portfolio. The Fed is likely to slash rates three times in 2024, with more cuts to follow in the next year. Moreover, improving confidence in the syndicated market will also compress spreads in the coming quarters. Wall Street currently expects CION’s investment income to fall below $1.60 level in 2025 due to rate cuts, which means its dividend coverage ratio will also drop below 100% based on its dividend of $1.61 per share.

On the positive side, after muted investment activity in the three quarters of 2023, the company’s investment commitments soared in the final quarter to $152 million from $97 million in the previous quarter. The credit quality of its portfolio also appears strong with only 0.9% of the portfolio investments being on non-accruals. Moreover, its investments that require close monitoring declined to 6.5% of the portfolio from 8.2% in the previous quarter and 15% in the year ago period.

It is currently sitting on $117 million cash and short-term investments and $153 million in available credit facility. CION continues to raise more debt to fund its investments and seeks to service its existing debt. Last year, its debt increased by $134 million or 14% year over year to $1.08 billion. It closed a $33 million Series A unsecured floating rate notes and completed a $100 million private offering of floating rate unsecured notes. At the end of the December quarter, its net debt to equity ratio was 1.10 times, up from 1.03 times in the previous quarter. CION’s $180 million of debt will mature in 2024 and $675 million in 2025. It appears that the company needs to be selective in its investment strategy because it already has high debt with a huge amount of repayment due in the coming quarters.

Valuations and Share Price Upside

Although CION’s massive dividend helped it generate healthy total return for shareholders in 2023, its stock price underperformed compared to the S&P 500. Furthermore, the share price underperformance increased significantly in 2024 due to the risk of negative financial growth. Its shares are down 6% year to date compared to a 9% gain from the broader market index.

However, from the dip buyer perspective, CION’s stock price appears to be significantly undervalued based on valuations and net asset value. Its stock is currently trading around only 6.60x forward earnings compared to the industry average of 8x and the sector median of 10x . Its book value of 0.62x is also down from the sector median of 1.13x. Moreover, the CION’s net asset value increased in the past three consecutive quarters due to higher earnings than dividends and unrealized gains. At the end of December quarter, its net asset value was $16.23 per share, up significantly from its current share price of $10.50.

Quant Rating

Quant rating eliminates emotions because the system relies on actual numbers. CION received a hold rating with a quant score of 3.42. In line with my opinion, seeking Alpha’s quant scorecard also shows that CION stock is trading at attractive valuations but negative growth and poor stock price momentum decline its overall rating score. The declining trend of its key financial numbers is likely to have a negative impact on its stock price and dividend performance in the short to mid-term. It is ranked at 30 out of 92 in its industry, according to quant rating.

In Conclusion

CION Investment could turn out to be a solid investment if it finds a way to sustain investment income growth. The challenges related to its potential to fund investments and repay its debt in the coming quarter could create a share price volatility and negatively impact its income growth potential. The dividend growth is also at risk due to negative growth.