Monthly Dividend Stock In Focus: Stellus Capital

Up to date on July sixteenth, 2021 by Bob Ciura

Because the saying goes, if one thing seems too good to be true, it normally is simply that. This will typically be utilized to unusually high-yielding dividend shares, lots of which have to chop their dividends in a recession.

For instance, Stellus Capital Funding Corp. (SCM) has a virtually 8% dividend yield, which could be very engaging on the floor. The S&P 500 Index, on common, has a dividend yield of simply 1.3%.

Not solely that, however Stellus pays its dividend every month, somewhat than every quarter like most corporations. This helps to make Stellus stand out, as we presently cowl simply ~51 month-to-month dividend shares.

You’ll be able to obtain the complete listing of month-to-month dividend shares (together with vital monetary metrics corresponding to dividend yields and payout ratios) by clicking on the hyperlink beneath:

Nevertheless, whereas excessive dividend shares are very interesting in a comparatively low-rate surroundings, traders should be certain the dividend is sustainable.

Stellus has a really excessive payout ratio close to 90%. As a BDC, Stellus is required to distribute primarily all of its earnings, so its payout ratio will at all times be excessive. Nevertheless, it’s in traders’ finest pursuits to fastidiously monitor the corporate’s earnings efficiency for indicators {that a} reduce within the distribution could also be coming.

This text will talk about Stellus’ fundamentals as they pertain to supporting its practically 8% dividend yield.

Enterprise Overview

Stellus is a Enterprise Improvement Firm, or BDC. It makes investments in small, predominantly non-public corporations which can be normally at an early stage of their progress cycles.

Stellus is a middle-market funding agency, and makes fairness and debt investments in non-public middle-market corporations. The corporate gives capital options to corporations with $5 million to $50 million of EBITDA and does so with a wide range of devices, the vast majority of that are debt.

Stellus gives first lien, second lien, mezzanine, convertible debt, and fairness investments to a various group of shoppers, usually at excessive yields, within the US and Canada.

Supply: Investor Presentation

It additionally has a extremely diversified funding portfolio, each geographically and when it comes to business focus. Stellus will make a wide range of debt investments together with first lien, second lien, uni-tranche, and mezzanine financing.

The investments are positioned in a wide range of industries, together with enterprise providers, industrial, healthcare, expertise, vitality, client merchandise, and finance. Invested capital is used for a variety of functions, together with acquisitions, progress investments, and extra. Stellus is externally-managed, by Stellus Capital Administration LLC, a registered funding advisor.

The corporate follows a disciplined funding technique. It has closed lower than 2% of offers reviewed. Its relative selectiveness permits the corporate to deal with the highest-quality investments.

It additionally means the corporate has way more funding alternatives than it wants, enhancing its potential to pick out solely the very best investments. Stellus generates significantly excessive yields from its first lien, second lien, and unsecured debt investments.

Subsequent, we’ll check out the corporate’s progress prospects.

Progress Prospects

A powerful catalyst for Stellus is its rising funding portfolio. Stellus has seen its funding portfolio rise at a speedy tempo over the previous 5 years, which has allowed the corporate to earn larger funding earnings.

Nevertheless, this all got here to a halt in 2020 because the coronavirus pandemic despatched the U.S. financial system right into a deep recession, which negatively impacted lots of Stellus’ investments.

The excellent news is that the corporate’s outcomes appear to have stabilized. Stellus reported first-quarter earnings on Might 6th, 2021, with outcomes coming in combined towards expectations. Funding earnings was $14 million for the quarter, which was down from $15.3 million within the 12 months–in the past interval, and was practically solely from curiosity earnings derived from portfolio investments.

Internet funding earnings got here to $5.1 million in Q1, down from $6.2 million within the 12 months–in the past interval. On a per-share foundation, NII-per-share declined 19% from the identical quarter final 12 months.

The rise in web property from operations was $4.9 million, up from the –$43.9 million decline in the identical interval a 12 months in the past, which was as a consequence of large disruption in monetary markets from COVID–19. This equated to a acquire of 25 cents per share on this 12 months’s Q1.

One other potential catalyst for Stellus might be larger rates of interest. As a main debt investor, Stellus may gain advantage from larger yields on its future investments. Increased inflation in 2021 might set the stage for charge hikes in 2022.

As well as, the corporate’s portfolio is nearly solely floating charge. This can be a constructive in a rising charge surroundings, however this leverage works each methods.

Dividend Evaluation

So far as dividend shares go, Stellus is just not a typical alternative. It has a comparatively quick dividend historical past of lower than 10 years, which suggests it has not but developed a protracted observe document of consistency.

You’ll be able to see a picture of the corporate’s distribution historical past beneath:

Supply: Investor Presentation

Stellus presently pays a month-to-month dividend of $0.0833 per share, which equates to an annualized payout of $1 per share. That is down from $0.1133 per share in 2020. The corporate reduce its dividend final 12 months because of the pandemic. On a constructive word, Stellus paid a particular dividend of $0.06 per share final 12 months, however dividends nonetheless stay properly beneath the height stage.

Internet funding earnings is anticipated to come back in at $1.15 per share for 2021. With the present annualized dividend of $1, Stellus is presently carrying a payout ratio of 87%. This implies the present dividend payout is sustainable, however simply barely. Bear in mind BDCs are required to distribute just about all of their earnings, so Stellus’ payout ratio will at all times be excessive.

Even so, the corporate doesn’t have a lot wiggle room. Even a modest decline in funding earnings might trigger the payout ratio to rise above 100%, which alerts a doubtlessly unsustainable dividend.

It is extremely vital that Stellus proceed to extend its funding, as its latest outcomes point out. Stellus is a high-risk, high-reward dividend inventory. If the corporate’s progress stays on observe, traders will obtain a ~8% return simply from the dividend, plus any capital appreciation from a rising share value.

Even when the corporate does keep its dividend, traders shouldn’t count on a lot when it comes to dividend progress going ahead. Internet funding progress has been sluggish and given the excessive payout ratio, we don’t see any catalysts for the next payout within the close to future.

Ultimate Ideas

Stellus might be a pretty decide because it has a nearly-8% dividend yield and a few measure of progress potential.

Plus, Stellus pays its dividend every month, which helps enhance the compounding impact of reinvested dividends and enhances the attractiveness of the inventory for these relying upon dividends for residing bills.

In fact, there is no such thing as a assure the corporate’s progress plans will likely be profitable and with a payout ratio nearing 100%, there’s not a lot room for error. Consequently, traders should settle for the chance of a future dividend reduce if monetary outcomes deteriorate. Solely traders prepared to take this threat ought to contemplate shopping for the inventory.