Monthly Dividend Stock In Focus: PennantPark Floating Rate Capital

Up to date on March seventh, 2023 by Samuel Smith

At first look, PennantPark Floating Fee Capital (PFLT) has nice enchantment to revenue buyers. That’s as a result of PennantPark has a staggering 10.8% dividend yield. As well as, in contrast to lots of its opponents, the corporate has managed to pay the identical dividend per share for seven consecutive years.

PennantPark is certainly one of over 100 shares in our protection universe with a 5%+ dividend yield. You possibly can 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 buyers to compound their wealth much more rapidly than a inventory that pays a quarterly or semi-annual dividend.

There are presently 69 month-to-month dividend shares. You possibly can 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 engaging dividend yield could also be too good to be true.

This text will focus on the corporate’s enterprise mannequin, and whether or not or not the payout is sustainable over the long run.

Enterprise Overview

PennantPark is a Enterprise Growth Firm, or BDC. It gives largely debt financing, usually first-lien secured debt, senior notes, second lien debt, mezzanine loans, or personal high-yield debt. It focuses on making debt investments to middle-market corporations. To a lesser extent, it additionally makes most well-liked and customary fairness investments. The newest stability sheet confirmed about 87% of the corporate’s whole investments had been in first-lien senior secured debt.

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

Supply: Investor Presentation

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

An summary of the corporate’s funding philosophy reveals PennantPark prefers middle-market corporations with $15 million to $50 million in annual EBITDA and has a excessive fee of underwriting success.

Solely 16 of the corporate’s 391 investments since inception have reached the non-accrual stage. This monitor report of excellent underwriting is a key benefit for PennantPark, and it’s this excellent credit score high quality that has helped the corporate keep its dividend on the similar fee for a number of years.

Supply: Investor Presentation

Above is a sampling of the sorts of investments the corporate makes in goal corporations. Not solely are the targets themselves from various 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. That is primarily a floating debt funding agency, nevertheless.

Progress Prospects

PennantPark has demonstrated a monitor report of profitable investments. Nonetheless, its publicity to floating fee devices has prompted its common portfolio 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 the firm confronted declines within the subsequent years. Nonetheless, the typical portfolio yield is again to 11.3% following the sizable will increase in charges we’ve seen in 2022 and 2023 to date.

As PennantPark’s portfolio is comprised of floating fee devices – largely tied to LIBOR – it advantages when rates of interest are rising. Low charges over the previous decade suppressed the corporate’s funding revenue, however the potential for increased charges is a future catalyst. To an extent, that has come true in 2022-2023 with rising charges.

Monetary outcomes for the primary fiscal quarter ended December 31, 2022, had been introduced by PennantPark Floating Fee Capital Ltd. on February eighth, 2023. The Board of Administrators declared a distribution of $0.10 per share, representing a 5.3% enhance from the newest distribution.

Through the three months ended December 31, 2022, funding revenue amounted to $31.3 million, comprising $27.6 million from first lien secured debt and $3.7 million from different investments. By comparability, for the three months ended December 31, 2021, funding revenue was $26.3 million, which included $20.1 million from first lien secured debt and $6.2 million from different investments.

The first purpose for the rise in funding revenue from the identical interval within the prior yr was the rise in the associated fee yield of the corporate’s debt portfolio.

Whereas we imagine PennantPark has the monitor report and monetary means to proceed rising within the coming years, we now have considerations over its skill to keep up its dividend. We forecast simply 0.1% common annualized progress within the coming years on an earnings foundation, from our 2023 base of $1.24 per share.

Dividend Evaluation

PennantPark pays a month-to-month distribution of $0.10 per share. The inventory has a really engaging annualized dividend yield of 10.8%. Even higher, it makes month-to-month dividend funds, so buyers obtain their dividends extra incessantly than they might on a quarterly schedule.

Associated: The ten Highest Yielding Month-to-month Dividend Payers

Nonetheless, additionally it is necessary to evaluate whether or not the dividend is sustainable. Abnormally excessive dividend yields may very well be a sign that the dividend is at risk. We’d anticipate a BDC to have a excessive yield, however the 10.8% yield is excessive even by BDC requirements.

PennantPark Floating Fee additionally has a extremely leveraged stability 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 working easily – because the secure dividend over the previous decade has proven – it might collapse if the economic system experiences a major and extended downturn that might trigger its loans to underperform.

Nonetheless, shareholders ought to definitely not anticipate a distribution enhance within the close to time period given how shut the payout is to earnings right this moment. PennantPark’s skill to develop the portfolio and its common yields, whereas holding bills below management, will decide if the distribution is sustainable.

The corporate presently earns extra in NII than it pays out in distributions. Thus, we aren’t anticipating a dividend reduce, however add that if credit score high quality deteriorates, or if charges transfer down, PennantPark’s earnings will undergo and a dividend reduce might grow to be a actuality. We notice this hasn’t occurred but, however dangers have risen for PennantPark given the way in which its portfolio is constructed with floating-rate devices. Charges are nonetheless rising right this moment, so we don’t see the dividend as in danger right this moment. Nonetheless, it’s one thing buyers ought to monitor constantly.

Closing Ideas

The previous saying “high-risk, high-reward” appears to use to PennantPark. It definitely has a pretty dividend yield on paper, however there doubtlessly may very well be dividend considerations down the street if rates of interest transfer decrease.

If every part goes in line with plan, the inventory may generate almost double-digit whole returns on an annual foundation from the yield alone.

There may be an elevated stage of danger for the corporate. If PennantPark doesn’t develop funding revenue, it may very well be pressured to cut back the dividend sooner or later sooner or later, however we don’t presently forecast that.

Nonetheless, buyers ought to tread fastidiously, and solely these with a better danger tolerance ought to think about shopping for PennantPark regardless of the very excessive yield.

If you’re fascinated with discovering extra high-quality dividend progress shares appropriate for long-term funding, the next Certain Dividend databases can be helpful:

The key home inventory market indices are one other stable useful resource for locating funding concepts. Certain Dividend compiles the next inventory market databases and updates them month-to-month: