Monthly Dividend Stock In Focus: Gladstone Capital

Up to date on Could twenty sixth, 2021 by Bob Ciura

Enterprise improvement firms, or BDCs, are a beautiful funding automobile for these centered on producing revenue. They typically distribute most of their earnings to shareholders and because of this, usually have very excessive yields.

Gladstone Capital Company (GLAD) is a BDC with a present dividend yield above 7%. It’s considered one of greater than 100 shares with a 5%+ dividend yield. You’ll be able to see the complete listing of established 5%+ yielding shares right here.

And, together with Gladstone Capital, there are lower than 60 shares that pay dividends every month, versus the extra conventional quarterly or semi-annual fee schedules.

You’ll be able to obtain our full Excel spreadsheet of all month-to-month dividend shares (together with metrics that matter like dividend yield and payout ratio) by clicking on the hyperlink beneath:

Gladstone Capital’s dividend yield towers above the remainder of the market. The S&P 500 Index, on common, has a dividend yield of simply 1.4%, which is one-fifth the yield of Gladstone Capital.

However a excessive yield will not be sufficient if the underlying enterprise is weak or the dividend is liable to being lower. This text will focus on whether or not or not Gladstone Capital is an efficient funding possibility for revenue buyers.

Enterprise Overview

Gladstone Capital operates as a Enterprise Improvement Firm and invests in debt and fairness securities, producing revenue primarily from its debt investments. These investments are made by way of quite a lot of fairness (10% of portfolio) and debt devices (90% of portfolio), typically with very excessive yields. Mortgage dimension is often within the $7 million to $30 million vary and has phrases as much as seven years.

Gladstone Capital chooses targets in steady industries with sustainable margins and money flows and favorable progress traits. The corporate focuses on non-cyclical and non-financial firms as a way to keep away from peaks and valleys in its goal firms’ earnings. These are firms with management positions of their respective industries, progress potential, and annual EBITDA between $3 million-$15 million.

To ensure that Gladstone Capital to maintain paying its hefty dividends to shareholders, which is its main acknowledged purpose, it’s important that its funding portfolio continues to generate curiosity and dividend revenue and capital positive factors in extra of its working and monetary bills.

It has a diversified portfolio, each when it comes to deal sourcing, and trade teams.

Supply: Investor Presentation

Loans made to those companies are often between $7 million-$30 million, with typically quick phrases of some years. Fairness investments embrace most well-liked or widespread inventory. Gladstone Capital seeks to keep up a 90%-10% cut up between debt investments and fairness investments.

On the finish of 2020, Gladstone Capital’s portfolio had a good worth of $452 million, with diversification throughout 47 firms and 18 completely different industries. The asset combine is pretty conservative at 91.5% of investments in secupurple loans, with 48.6% in lower-risk first lien loans.

Because of the corporate’s funding technique, the corporate has appreciable progress alternatives to sit up for.

Progress Prospects

One of the vital compelling progress catalysts for Gladstone Capital is rising rates of interest. The corporate stands to learn from increased rates of interest as a result of the vast majority of its debt portfolio is in variable-rate securities.

Gladstone reported second-quarter outcomes on Could 4th, 2021, and the corporate missed expectations on each the highest and backside strains. The corporate invested $72 million in three new portfolio firms, and after $48 million in repayments, posted internet new originations of $24 million for the quarter.

Secured first lien property rose to 58% of the whole portfolio and Gladstone maintained a weighted common yield on debt of 10.6%. Gladstone’s debt and fairness portfolios generated $16 million of market appreciation in Q2. That helped drive a 9.6% enhance in NAV from the tip of the December quarter, and it stood at $271 million on the finish of Q2.

On a per–share foundation, NAV rose 6.6% to $8.11. Web funding revenue was up 1.9% over the prior quarter to $6.4 million. Decrease bills helped enhance margins for Gladstone, driving a internet enhance in property of 65 cents per share.

Wanting additional again, Gladstone has had a tough time producing progress. Gladstone’s share issuances have funded increased NII in greenback phrases however haven’t earned sufficient above its price of capital to maneuver the needle on NII–per–share. Given this historical past, we reiterate our estimate of Gladstone’s lengthy–time period progress price at 0%.

The yields on the corporate’s portfolio affect its skill to earn income and subsequently, cowl its bills and pay distributions to shareholders. Over time, the corporate’s portfolio yield has drifted increased to almost 11%, the place it’s right this moment. Nevertheless, increased bills have offset that progress not too long ago, which is a part of the reason why NII–per–share continues to be flat over time.

We notice that Q2’s bills had been decrease, however that is an outlier. Gladstone’s portfolio continues to develop in greenback phrases, however given its offsetting rising bills, and mortgage non–accruals, NII has not grown.

Dividend Evaluation

Gladstone Capital pays a month-to-month dividend, which permits shareholders to obtain 12 dividend funds per 12 months, extra frequent than 4 quarterly distributions. It presently pays a month-to-month dividend of $0.065 per share, after a ~7% dividend lower final 12 months from the earlier degree of $0.07 per share.

We consider it’s unlikely that Gladstone Capital will elevate its distribution within the close to future. On an annual foundation, Gladstone Capital’s dividend represents a excessive yield of seven.1%.

Subsequently, Gladstone Capital has a strong observe report of regular payouts, even throughout the Nice Recession of 2008-2009. The corporate can preserve its excessive yield, due to its tax classification, and its favorable fundamentals. BDCs are required to distribute no less than 90% of any taxable revenue. This eliminates revenue tax on the company degree, permitting capital positive factors to be handed via to shareholders, just like a REIT.

With a projected dividend payout ratio of 94% for 2021, Gladstone Capital’s dividend payout is safe however with out lots of cushion. BDCs will all the time have excessive payout ratios because of the tax rule of distributing almost all of their revenue, however it’s straightforward to see why Gladstone Capital hasn’t raised its payout for such a very long time.

This can be a tight payout ratio, which suggests the corporate might not be capable to maintain a serious financial downturn and preserve its dividend. In consequence, had been one other vital monetary disaster to happen, Gladstone Capital’s dividend might be in jeopardy.

Assuming continued financial progress, its dividend seems to be sustainable. However the excessive payout ratio introduces comparatively excessive threat to the sustainability of the dividend, notably throughout a recession.

Last Ideas

Buyers ought to method excessive dividend yields with warning. Excessive yields are commonplace within the BDC asset class, however many have lower their dividends over the previous few years. For its half, Gladstone Capital diminished its dividend modestly final 12 months, however we don’t consider one other dividend lower is imminent.

Nevertheless, buyers might want to pay shut consideration to the corporate’s future earnings studies. It has a really tight payout ratio and any vital deterioration within the efficiency of its funding portfolio may threaten the dividend.

General, Gladstone Capital is probably going solely enticing for revenue buyers searching for excessive yields.