Monthly Dividend Stock In Focus: PennantPark Floating Rate

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

At first look, PennantPark Floating Charge Capital (PFLT) has nice enchantment for earnings traders. That’s as a result of PennantPark has a staggering 9% dividend yield.

PennantPark is one among over 100 shares in our protection universe with a 5%+ dividend yield. You’ll be able to see the whole record of 5%+ yielding shares by clicking right here.

Not solely that, however PennantPark additionally pays its dividend every month. This enables traders to compound their wealth much more rapidly than a inventory that pays a quarterly or semi-annual dividend.

There are at present fewer than 60 month-to-month dividend shares. 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 under:

However, as is so typically the case with sky-high dividend yields, PennantPark’s enticing dividend yield could also be too good to be true.

This text will talk about the corporate’s enterprise mannequin, and whether or not or not the payout is sustainable over the long-term.

Enterprise Overview

PennantPark is a Enterprise Improvement Firm, or BDC. It gives principally debt financing, usually first line secured debt, senior notes, second lien debt, mezzanine loans, or personal high-yield debt. It makes a speciality of making debt investments to center market firms. To a lesser extent, it additionally makes most popular and customary fairness investments.

The corporate’s portfolio is extremely diversified, with no specific business making up greater than 8% of the overall combine, and the overwhelming majority comprising lower than 3% of the overall.

Supply: Investor Presentation

As well as, the corporate’s portfolio is totally floating price, which opens up its yields to rate of interest volatility. This may be good in instances of rising charges, however is unfavorable ought to charges decline.

An summary of the corporate’s funding philosophy reveals PennantPark prefers center market firms with $15 million to $50 million in annual EBITDA, and has a excessive price of underwriting success.

Solely 13 of the corporate’s 391 investments since inception have reached the non-accrual stage. This monitor document of excellent underwriting is a key benefit for PennantPark.

Supply: Investor Presentation

Above is a sampling of the kinds of investments the corporate makes in goal firms. Not solely are the targets themselves from numerous industries and geographies, however PennantPark has quite a lot of devices with which to make its investments.

First lien secured debt is the popular instrument given its favorable compensation place, however the firm will do revolvers and fairness injections as nicely. As of the top of March, 86% of PennantPark’s portfolio was first lien senior secured debt.

Development Prospects

PennantPark has demonstrated a monitor document of profitable investments. Nonetheless, its publicity to floating price devices has brought on its common yield to fall over the previous a number of years. The yield on PennantPark’s portfolio peaked at simply over 9% on the finish of 2018, however decrease charges on risk-free devices has brought on its common yield to say no.

As PennantPark’s portfolio is totally comprised of floating price devices – principally tied to LIBOR – it advantages when rates of interest are growing. Low charges over the previous decade have suppressed the corporate’s funding earnings, however the potential for greater charges is a future catalyst.

PennantPark reported first-quarter earnings on Might 5th, 2021. Adjusted web asset worth per share got here in at $12.60, up 2.3% sequentially, whereas total funding earnings for the quarter decreased to $19.4 million from $26.3 million within the 12 months–in the past quarter. The yield on debt investments was 7.6%.

In the meantime, the firm invested $160.2 million through the quarter in four new and 17 present portfolio firms with a weighted common yield on debt investments of seven.4%. That mentioned, the corporate’s gross sales and repayments of investments for a similar interval totaled $172.1 million.

Money equivalents as March 31, 2021, stood at $66.6 million in comparison with $57.5 million in September 30. 2020. FQ1 web funding earnings fell to $0.26 from $0.52 within the 12 months–in the past interval.

Whereas we consider PennantPark has the monitor document and monetary means to proceed rising within the coming years, we now have considerations over its skill to take care of its dividend.

Dividend Evaluation

PennantPark pays a month-to-month distribution of $0.095 per share. The inventory has a really enticing annualized dividend yield of 9%. Even higher, it makes month-to-month dividend funds, so traders obtain their dividends extra steadily than they might on a quarterly schedule.

Nonetheless, additionally it is necessary to evaluate whether or not the dividend is sustainable. Abnormally excessive dividend yields might be a sign that the dividend is at risk.

PennantPark Floating Charge additionally has a extremely leveraged steadiness sheet and a payout ratio that typically nears or exceeds 100% of earnings. Whereas the firm can most likely maintain this mannequin whereas the economic system is operating easily –because the rising and secure dividend over the previous decade has proven –it might collapse if the economic system experiences a major and extended downturn that will trigger its loans to underperform.

Nonetheless, shareholders ought to actually not anticipate a distribution improve within the near-term given how shut the payout is to earnings at the moment. PennantPark’s skill to develop the portfolio and its common yields, whereas preserving bills underneath management, will decide if the distribution is sustainable.

The corporate at present earns extra in NII than it pays out in distributions. Thus, we aren’t anticipating a dividend lower, however add that if credit score high quality deteriorates, or if charges transfer down additional, PennantPark’s earnings will endure and a dividend lower might change into a actuality. We word this hasn’t occurred but, however dangers have risen for PennantPark given the way in which its portfolio is constructed with floating-rate devices.

Remaining Ideas

The previous saying “high-risk, high-reward” appears to use to PennantPark. It actually has a horny dividend yield on paper, however there may be extra danger to the payout than meets the attention.

If the whole lot goes in line with plan, the inventory might generate practically double-digit whole returns on an annual foundation from the yield alone. Larger rates of interest can be a optimistic catalyst, however charges are more likely to stay low for the foreseeable future.

There may be an elevated degree of danger for the corporate. If PennantPark doesn’t develop funding earnings, it might be compelled to scale back the dividend in some unspecified time in the future sooner or later.

In consequence, traders ought to tread rigorously. Solely traders with the next danger tolerance ought to think about shopping for PennantPark regardless of the very excessive yield.