Monthly Dividend Stock In Focus: Main Street Capital

Up to date on Might twenty first, 2021 by Bob Ciura

Enterprise Improvement Corporations – or BDCs, for brief – generally is a nice supply of present yield for revenue buyers.

Most important Avenue Capital Company (MAIN) is a superb instance of this. This BDC has a present dividend yield of 6%. Higher but, Most important Avenue Capital Company pays month-to-month dividends.

You may 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:

The inventory’s excessive dividend yield and month-to-month funds make it a stable alternative for revenue buyers. However what in regards to the power of the underlying enterprise?

Thankfully for buyers, Most important Avenue Capital’s enterprise seems to be performing nicely. This text will focus on the funding prospects of Most important Avenue Capital Company intimately.

Enterprise Overview

Most important Avenue Capital Company is a Enterprise Improvement Firm, or BDC. You may see our full BDC checklist right here.

The corporate operates as a debt and fairness investor for decrease center market corporations (these with $10-$150 million of annual revenues) searching for to remodel their capital buildings. The BDC has the potential to spend money on each debt and fairness, which provides it a major benefit over corporations who spend money on personal debt or personal fairness alone.

Most important Avenue Capital Company additionally invests within the personal debt of center market corporations (not decrease center market corporations) and has a budding asset administration advisory enterprise.

Supply: Investor Presentation

The BDC’s company construction is relatively easy. Most important Avenue Capital Company operates three funds:

• The Most important Avenue Mezzanine Fund
• The Most important Avenue Capital II Fund
• The Most important Avenue Capital III Fund

Since Most important Avenue Capital Company is the operator of its personal funding funds, administration charges are stored to a minimal, which provides it a cost-based aggressive benefit over its rivals who outsource their fund administration.

Most important Avenue Capital Company’s holdings are extremely diversified by each transaction sort and geography. By transaction sort, the BDC acquires most of its offers by way of recapitalization and leveraged buyouts. Most important Avenue Capital Company additionally has a really excessive diploma of diversification by business.

Development Prospects

Most important Avenue Capital Company’s development prospects come from its distinctive technique to driving funding returns. Buyers who personal the inventory are rewarded because the BDC sustains its excessive month-to-month dividend and grows it over time.

On the enterprise stage, Most important Avenue Capital Company’s development might be pushed by its experience within the decrease center market section of the financial system.

On Might 6th, Most important Avenue Capital launched first-quarter outcomes. Internet funding revenue of $39.8 million was a 9% improve in comparison with $36.5 million a yr in the past. The company generated internet funding revenue per share of $0.58, up 2% from final yr’s revenue of $0.57. Distributable internet funding revenue per share totaled $0.62, up 2% from $0.61 within the first quarter of 2020.

Most important Avenue’s internet asset worth per share elevated in comparison with the tip of 2020, from $22.35 to $22.65. The company declared month-to-month dividends of $0.205, representing an annual dividend of $2.46 per share. As of the tip of first quarter 2021, the company had mixture liquidity of $818 million, consisting of $65 million in money and money equivalents, $693 million of unused capability below the revolving credit facility, and $60 million remaining within the Small Enterprise Funding Firm debenture capability.

To conclude, Most important Avenue Capital Company has experience within the decrease center market of its business and has a budding asset administration enterprise that allows it to have robust operational leverage. These components will drive the BDC’s development for the foreseeable future.

Aggressive Benefits & Recession Resiliency

As an funding supervisor, Most important Avenue Capital Company’s principal aggressive benefit comes from the expertise it employs to supply and fund offers.

The corporate’s senior administration crew has been largely unchanged since inception. The corporate’s CEO, Vince Foster, has been in place because the 2007 IPO and labored for the predecessor of Most important Avenue Capital Company beforehand.

An analogous stage of longevity is seen throughout Most important Avenue’s senior govt crew. Most important Avenue Capital Company additionally has a cost-based aggressive benefit. As an internally-managed personal investor, Most important Avenue generates considerably decrease working bills than its externally-managed counterparts, which helps enhance internet revenue.

As talked about, Most important Avenue Capital Company additionally has a sturdy aggressive benefit because of its distinctive experience within the decrease center market personal debt & fairness section. This section is usually too small for industrial banks to lend to, however too giant for the small enterprise representatives of retail banks to lend to.

Finance corporations and asset managers are sometimes susceptible to recessions since buyers are more likely to pull their cash to chop losses when monetary markets are in misery. With that mentioned, Most important Avenue invests in personal offers and lacks the identical sort of liquidity as, say, a mutual fund. Thus, Most important Avenue Capital Company is predicted to be reasonably recession-resilient.

Though Most important Avenue Capital Company got here public shortly earlier than the final recession, the corporate carried out nicely throughout this tough operational interval:

• Internet-investment-income-per-share 2007 – $0.76
• Internet-investment-income-per-share 2008 – $1.15 (51% improve)
• Internet-investment-income-per-share 2009 – $0.92 (20% lower)
• Internet-investment-income-per-share 2010 – $1.16 (26% improve)
• Internet-investment-income-per-share 2011 – $1.69 (46% improve)
• Internet-investment-income-per-share 2012 – $2.01 (19% improve)

The corporate’s monetary outcomes had been additionally spectacular from the angle of distributable internet revenue:

• Distributable-net-investment-income 2007 – $1.10
• Distributable-net-investment-income 2008 – $1.44 (31% improve)
• Distributable-net-investment-income 2009 – $1.50 (4% improve)
• Distributable-net-investment-income 2010 – $1.50 (no change)
• Distributable-net-investment-income 2011 – $1.56 (4% improve)
• Distributable-net-investment-income 2012 – $1.71 (10% improve)

Whereas Internet-investment-income-per-share declined from 2008 to 2009, Most important Avenue Capital returned to development the next yr. All mentioned, Most important Avenue Capital Company seems pretty recession-resistant.

Valuation & Anticipated Returns

Conservatively, we count on internet funding revenue to develop at 2% yearly by way of 2026. Over the previous decade, Most important Avenue Capital has traded with a median price-to-net-investment-income ratio of 15. Based mostly off of the present share worth and anticipated net-investment revenue of $2.35 per share for 2021, the inventory has a P/NII ratio of 17.5.

Our honest worth estimate for Most important Avenue inventory is a P/NII ratio of 14.8. Subsequently, a declining valuation a number of might scale back annual returns by 3.3% over the following 5 years.

The excessive dividend yield is predicted to account for the majority of Most important Avenue’s complete returns, with a smaller contribution from NII-per-share development.

Supply: Investor Presentation

Anticipated complete annual returns are as observe:

• 6% dividend yield (contains supplemental dividends)
• 2% net-investment-income development
• -3.3% valuation a number of discount

We count on that shares of Most important Avenue Capital can provide a complete annual return of 4.7% by way of 2026. This can be a first rate, though unspectacular, anticipated charge of return for Most important Avenue inventory.

Remaining Ideas

Though Most important Avenue Capital Company is off-the-radar for many dividend development buyers, this BDC has a powerful historical past of delivering substantial shareholder returns.

The agency’s robust monitor document of superior funding administration and experience within the decrease center market section give it a powerful aggressive benefit within the personal fairness and debt business.

Additional, Most important Avenue Capital Company is shareholder-friendly with a excessive yield and month-to-month payouts. The inventory’s excessive yield and month-to-month dividend funds is likely to be appropriate for revenue buyers, though the modest anticipated charge of return retains the inventory as a maintain suggestion proper now.