A businessman is working on laptop and has Private Equity inscription, a innovative business idea
Today we’ll talk about a pair of dividend stocks that are cheap and pay 11.2 percent. For good measure we’ll add another one that is a bargain, even when it “only” offers 9.5 percent.
I jest because I love. Dividends is what they are. In bear markets, they don’t typically last for much more than that. Therefore, it’s the double-digit yield buying we do.
These are some serious yields that we’re considering, and the ones that require us to take a break on dividends only. They’re difficult to find in the aforementioned over-followed, over-analyzed and suffoc blue-chip stocks. However, they’re plentiful throughout BDCland (populated through businesses development corporations (BDCs), of course).
Similar to REITs, also known as real investments in real estate (REITs), business development companies are the result of the creation of Congress. They are not a way to encourage real estate investments, they were created to provide a boost to America’s small-scale businesses. They supply the capital needed by small businesses that banks won’t provide due to risks, and they might if they are offered at excessively high rates.
There are many reasons to love this largely unexplored business:
- BDCs as well as REITs are required to pay at minimum 90% of the tax-deductible earnings to shareholders in the forms of dividends. For BDCs, you’re talking extravagant payouts that typically range between the single or low double single digits.
- They supply capital to an array of businesses, which makes them private equity firms that we and you can purchase publicly!
- BDCs do not receive any coverage from analysts or media because they’re complex and boring, so it’s not uncommon for them to be undervalued. This allows us to pick these up at a lower price than they’re worth.
Sometimes, these stocks can be inexpensive due to reasons. BDCs are not immune to bad times. They were largely avoided by contrarians this year due to the fact that it’s not really the purpose of dividends when we’re losing it on value?
Let’s take a examine our first 11.2 percent payee. It’s trading at just 66 percent of its book which is also known as its the net asset value (NAV). That means we’re buying into the company at one cent for every dollar of assets. Cheap!
PennantPark Investment (PNNT)
Dividend Yield: 11.2% yield
Price/NAV: 0.66
PennantPark Investment (PNNT)might seem familiar to regular readers, as it’s the sibling to PennantPark the Floating Rate Capital (PFLT) which I’ve been keeping an eye on for a long time.
PennantPark is a fund that invests in non-controlling and debt equity of predominantly U.S.-based middle-market firms that have EBITDA of between $10 million and $50 million. The portfolio currently includes 123 companies in 32 distinct industries, with the highest concentration of business services (18 18%)) and healthcare, education , and childcare (12 percent).
The company states that it is looking for “proven managers, market-leading positions, solid cash flow, potential for growth and feasible options for exit.” Actually, many BDCs seek the majority of these characteristics. What’s more important is that PNNT typically is a conservative underwriter and has very few non-accruals in hundreds of investments during the 15 years it has been in existence.
This shrewd approach wasn’t enough to ward off a major blow when it came to the COVID downturn. For 2020, PNNT cut its pay by about a third, bringing it down to twelve cents per share. It was encouraging that the company has increased the amount of money it paid out increasing it by four times over the last four quarters, and now at 16.5 cents.
A single ding in the middle of the generational crisis is an event in itself however, it was PennantPark’s 2nd rodeo. PNNT was forced to take an increase from 28 cents to 18 cents (~36%)) in dividends in 2017, due to the poor performance of the energy sector.
Additionally even though PennantPark Investment is named differently from PennantPark Floating Rate Capital, 96% of the debt in PNNT’s portfolio — which is roughly three-quarters of the portfolio is floating rate. It’s a good thing when rates are increasing, since it’s more benefitted by Fed rate increases than BDCs that have fixed-rate investments. However, if and when Jerome Powell flips the switch back to rate reductions this portfolio might not be as attractive as it is now.
The 34% discount on NAV is one of the largest deals within the BDC world today.
Prospect Capital (PSEC)
Dividend Yield: 9.5%
Price/NAV: 0.76
Prospect Capital (PSEC) is among the biggest BDCs. (BDCs). It has helped fund more than 400 investments over the past two decades of public traded existence. It currently has $8.5 billion in investments across 128 companies in 37 different industries.
PSEC’s main business is middle-market loans, which comprise 53% of its portfolio. The company invests in American firms that have EBITDA (earnings before taxes, interest depreciation, amortization, and interest) that exceed $150 million, mostly via Senior secured loan. However, it also has arm specifically focused in real estate (primarily multi-family) investing (19 percent) middle-market buyouts (16 percent) as well as subordinated structured notes (9 9 percent).
I’ve often criticized Prospect Capital for not taking advantage of its size and size. However, it has provided subpar performance over the long term compared to BDC industry’s top players, and has reduced its dividend twice since the year 2014.
The last couple of years of aggressive growth have finally begun to pay off, however. PSEC shares are now more competitive in recent times as its operations have been improved. Net interest income for the FY ended June was up by 9.9 percent and, at 81 which was more than 72 cents in monthly dividends. I’ve previously discussed the BDC’s coverage of dividends, which is why this is a significant change.
Prospect Capital still has some doubts, including its significant exposure to an incredibly obscure investment in National Property REIT Corp. Its portfolio consists of mostly multi-family properties. The company is also plagued by excessive management fees. While the discount of 24% to NAV is certainly appealing on the surface, PSEC has long traded at a huge discount. It will require a massive catalyst to ever make a difference to the price.
PSEC might finally be able to right its many years-old mistakes. But considering that Prospect’s management has been largely unchanged — it’s the same team that has delivered many disappointments for shareholders–a good amount of caution (and some healthy doubt) is appropriate.
Crescent Capital BDC (CCAP)
Dividend Yield: 11.2%
Price/NAV: 0.73
Crescent Capital BDC (CCAP)is another debt-minded, moderately-managed BDC. It’s also extremely affordable at 27% discount over NAV, which you could in a small amount put down to a lack of performance in the last year or more.
The majority of CCAP’s portfolio are floating-rate in the sense of. Unitranch First Lien and senior secured investments comprise most of the portfolio, occupying 89% of fair value.
It is a very well-positioned portfolio that is also defensive. Crescent is currently investing in 136 companies spread across 18 sectors, however, it has an extremely high level of over-weight (86 percent in fair values) in non-cyclical sectors. Investments in health care equipment comprise the largest percentage with 29% of the portfolio, followed by 21 percent in services and software. If you’re in search of geographical broadening, CCAP offers a little of 10% of its portfolio being invested in Europe, Canada and Australia.
Of course, the portfolio will look quite soon. Crescent Capital is expected to complete its acquisition from First Eagle Alternative Capital (FCRD)as early as the fourth quarter of the year. The First Eagle portfolio of 73 investments is mostly senior first lien debt. FCRD is trying to limit each purchase to less that 2.5 percent of the portfolio.
It’s an expensive purchase: First Eagle garnered $4.86 per share, a huge 66% profit that’s spread between CCAP shares and the cash of Crescent Capital and cash from CCAP’s adviser, Crescent Cap Advisors.
In the end, CCAP stopped its streak of consecutive quarters that paid a five-cent special dividend. This isn’t a small amount–it added an additional 1.3 points to its already impressive yield. But CCAP’s management seems to be keen to keep some cash to watch the process unfold.
