Get Paid Monthly with Stellus Capital Investment Corp
Business development companies (BDCs) came into being back in 1980, when then-President Jimmy Carter signed the Small Business Investment Incentive Act into law.
The bill was designed specifically for lending to small- and mid-sized businesses. (Source: “H.R.7554 – An Act to Amend the Federal Securities Laws to Provide Incentives for Small Business Investment, and for Other Purposes.” Congress, last accessed October 28, 2024.)
The bill didn’t result in a wave of new lending to smaller businesses. Instead, venture capital funds became the preferred way to fund emerging companies.
By the end of the 1990s, only a handful of BDCs were listed on public stock exchanges. But then came the 2008 financial crisis. Once the smoke cleared, Congress introduced a number of regulations that made it exceptionally difficult to launch a new bank or lend to small- and mid-sized businesses.
As a workaround, financiers dusted off the Small Business Investment Incentive Act loophole to launch an alternative set of financial institutions. Since then, BDCs have quietly emerged as a force in the financial world. Today, there are roughly 140 BDCs with over $312.0 billion in assets under management, up from $23.0 billion in 2009. (Source: “About BDCs,” BDC Council, last accessed October 28, 2024.)
Why should income investors care about BDCs, or what we like to call “Alternative Banks” here at Income Investors?
Like real estate investment trusts (REITs), BDCs are legally required to distribute at least 90% of their taxable income to shareholders through dividends.
While the high-interest-rate environment posed a challenge for many BDCs, the lower-interest-rate cycle should result in more BDCs issuing debt, which should help juice their bottom lines.
One of the best-performing BDCs right now is Stellus Capital Investment Corp (NYSE:SCM).
Stellus Capital is a BDC that specializes in investing in private middle-market companies in the U.S. and Canada. It invests through first-lien, second-lien, unitranche, and mezzanine debt financing, often with a corresponding equity investment. (Source: “Overview,” Stellus Capital Investment Corp, last accessed October 28, 2024.)
It generally makes investments of between $20.0 million and $100.0 million in companies generating between $5.0 million and $50.0 million in earnings before interest, taxes, depreciation, and amortization (EBITDA).
To date, Stellus has completed over 350 investments and currently has 80+ active investments with $2.9 billion in assets under management.
Some of the sectors the BDC invests in include aerospace & defense, consumer products & services, distribution, financial services, food & beverage, health care, industrial services, media & entertainment, and software & technology.
Some of the companies Stellus has invested in include ad.net., Atkins Nutritionals, Dr.Scholl’s, Petmate, and US Auto. (Source: “Portfolio,” Stellus Capital Investment Corp, last accessed October 28, 2024.)
Solid Second-Quarter Results
For the second quarter ended June 30, Stellus announced that net investment income increased 13.2% year over year to $11.79 million, or $0.48 per share. Its core net investment income jumped 14.6% to $12.37 million, or $0.50 per share. (Source: “Stellus Capital Investment Corporation Reports Results for its Second Fiscal Quarter Ended June 30, 2024,” Stellus Capital Investment Corp, August 7, 2024.)
Investment income came in at $26.6 million, most of which was interest income from portfolio investments. As of June 30, the company’s loan portfolio was yielding 11.7%. Stellus Capital also had $169.4 million in outstanding borrowings under its credit facility.
Commenting on the results, Robert T. Ladd, the BDC’s chief executive officer, said, “I am pleased to report solid operating results for the quarter ended June 30, 2024, in which U.S. GAAP net investment income of $0.48 per share and core net investment income of $0.50 per share covered the regular dividend declared of $0.40 per share. Our loan portfolio is yielding 11.7%, as of June 30, 2024.”
Declares Monthly Distribution of $0.1333 Per Share
Thanks to the company’s growing free cash flow, Stellus is able to provide investors with a reliable monthly dividend. Most recently, it declared a monthly dividend of $0.1333 for each of October, November, and December. (Source: “Stellus Capital Investment Corporation Announces $0.40 Fourth Quarter 2024 Regular Dividend, Payable Monthly in Increments of $0.1333 in November and December 2024, and January 2025,” Stellus Capital Investment Corp, October 10, 2024.)
This works out to $0.40 for the fourth quarter, or $1.60 on an annual basis, for a current ultra-high dividend yield of 11.23%.
Over the last 11 years of operations, Stellus shareholders have received a total of $262 million in distributions, which is equivalent to $15.75 per share, or 110% of its current share price.
Stellus Capital Stock Hits Record High
More often than not, ultra-high-yield dividends are attached to a stock that is depressed. That’s because share price and dividends have an inverse relationship. Fortunately, that isn’t why Stellus has such a high dividend.
The 11.23% dividend yield isn’t a fluke or a result of a low share price. Stellus Capital stock is trading at record levels and has a five-year average dividend yield of 10.44%.
In fact, SCM stock hit a new record high of $14.44 on October 25. It continues to trade near that level.
As of this writing (October 28), Stellus Capital stock is up:
- 21.3% year to date
- 30.5% year over year
Big gains, but Wall Street expects Stellus Capital stock to hit fresh highs over the coming quarters, with analysts providing a 12-month share price target of $15.50.
Chart courtesy of StockCharts.com
The Lowdown on Stellus Capital Stock
Stellus Capital Investment Corp is one of the longest-tenured BDCs specializing in senior secured loans in the lower middle market. Collectively, Stellus has invested more than $8.5 billion in the lower middle market credit and equity investments across multiple cycles and industries over the last 19 years.
Thanks to the BDC’s reliable cash flow, Stellus Capital stock is able to provide investors with a reliable monthly dividend. Its solid financial results are also why investors have sent SCM stock to record levels… and are expected to send it higher over the coming months.