Exchange-traded fund and mutual fund providers have consolidated in a big way in recent years. The number of these independent companies has dwindled via mergers, and the ones that are left are generally not thought of as income stocks.

U.S. Global Investors, Inc. (GROW) pays a dividend, but with a low yield of just 1.3% that is well below the S&P 500 average yield. On the plus side, the company pays its dividends monthly, instead of quarterly or semi-annually. This allows for more frequent payments for those investors that purchase stocks primarily for income.

U.S. Global Investors’ yield of just 1.3% is unattractive from an income perspective, even if it is paid monthly. In addition, we see future growth as challenging. And while the dividend is likely safe for now, deteriorating earnings could result in a payout cut or suspension in the future.

This article will analyze the investment prospects of U.S. Global Investors in greater detail.

Business Overview

U.S. Global Investors began more than 50 years ago as an investment club. Today, it is a publicly-traded registered investment advisor that looks to provide investing opportunities in niche markets around the world. The company provides sector-specific exchange-traded funds and mutual funds and recently moved into crypto-currencies. U.S. Global Investors produces less than $4 million in annual revenue and has a market capitalization of just $35 million.

Source: Investor presentation, page 48

The company has a number of niche products in its portfolio of offerings, with the breakdown at roughly two-thirds in emerging markets and natural resources, and the balance in US equity and fixed income products. In addition, U.S. Global Investors’ customer base is almost entirely retail investors, with institutional holdings at just one-sixth of total assets.

Retail investors tend to move money in and out of products more often than institutional investors, so we see this as hindering future growth, in addition to making results more volatile.

Source: Investor presentation, page 13

Indeed, as we can see above, assets under management have been somewhat volatile, but have moved decidedly in the wrong direction over the past three years. The company breaks out Galileo AUM above because that unit was recently sold, but this doesn’t change the story.

U.S. Global Investors is not unique among asset managers in seeing volatile AUM, but its very small scale and a negative trend in AUM is concerning from our perspective.

Source: Investor presentation, page 42

The company’s fiscal third-quarter – which ended on March 31st – showed very weak results once again. The company’s operating loss came in at nearly $1 million, with that loss ballooning to almost $1.5 million after accounting for investment losses. Net earnings, therefore, declined from a profit of $748,000 in the year-ago period to a loss of $1.6 million in this year’s Q3.

U.S. Global Investors continues to struggle with pricing power of its ETFs and mutual funds, as the broader industry has struggled. Providing investment products has become progressively cheaper over time and with more choice than ever, the providers of those products have no choice but to lower their pricing to remain competitive. The only antidote to this is higher volumes via rising assets under management, but U.S. Global Investors has failed to achieve this. Given all of this, we are quite cautious on the company’s growth prospects, as we will detail below.

Growth Prospects

We see U.S. Global Investors as struggling to grow in the coming years. We expect low earnings for the foreseeable future as headwinds to profitability persist.

This isn’t a new phenomenon, however, as the company has struggled for years with profitability.

Source: Investor presentation, page 12

This look at quarterly earnings-per-share highlights the inherent volatility in the company’s results since 2017. The company’s third-quarter results showed higher revenue thanks to higher AUM, but these gains were more than offset by the cost to support higher AUM. In addition, the company has investments of its own that produce fairly sizable gains and losses in any particular quarter, including its investment in HIVE Blockchain Technologies (HVBTF).

U.S. Global Investors bought its stake in HIVE for a total of $2.4 million as a way to gain exposure to cryptocurrencies. HIVE is a crypto-currency miner, meaning it has supercomputers that mine Bitcoin, Ethereum, and others.

U.S. Global Investors’ position in HIVE was only worth $1.3 million at the end of March as shares of HIVE fell markedly during that period. The stock has since nearly doubled as financial markets and crypto-currencies have rebounded, so we expect the company’s position in HIVE to be worth somewhere around $2.5 million as of the end of the fiscal year. This will help bolster results, but investors should keep in mind that a huge investment in a penny stock that mines crypto-currencies is far from a safe long-term strategy.

While certain quarters – like fiscal Q4 that ended in June – will show large investment gains for U.S. Global Investors, we see the long-term business model as challenged. We, therefore, do not believe the growth prospects of this company are particularly enticing.

Dividend Analysis

U.S. Global Investors has paid its dividend on a monthly basis for more than 11 consecutive years, which is a decent track record. At the current payout of $0.03 per share annually, the stock yields 1.3%. On a yield basis, U.S. Global Investors is far from attractive.

The problem is that with an extremely murky outlook for earnings growth, we believe dividend growth will also be very difficult to come by. On the plus side, the current payout costs the company only about $450,000 per year. And with a clean balance sheet, we believe it can continue to pay the dividend for some time if it were to choose to fund it with cash on hand rather than earnings.

Source: Investor presentation, page 9

The company’s cash and equivalents balance has declined over time as well, but it had nearly $15 million in total at the end of March. With HIVE’s rebound, that number should be somewhat higher for the end of the fiscal year. U.S. Global Investors has enough cash and short-term bonds on the balance sheet that it could theoretically pay the dividend for years without earnings. Thus, we believe the payout is safe at this point.

Final Thoughts

U.S. Global Investors has a tough road ahead of it. The company has to compete with other asset managers that are many times its size in an industry where scale means pricing power. This company has no scale or pricing power and is seeing rising operating costs.

Given this, and the fact that the dividend yield is so low, we think investors should avoid this stock. There are many better choices in terms of payout growth, current yield, and dividend growth.