12%-Yielding FS KKR Capital Corp Shrugging Off Trade War?
March 11, 2025
FS KKR Capital Corp Pays a Special Dividend
President Donald Trump’s tariffs against Canada, Mexico, and China kicked in on March 4, sending U.S. and global stocks tumbling. In fact, the markets wiped out all of the gains made since the November 2024 elections. While the markets are reeling from the blood bath, not all stocks are taking a beating. One stock in particular that seems to have shrugged off the trade war is FS KKR Capital Corp (NYSE:FSK).
FS KKR Capital Corp is a business development company (BDC), or what we here at Income Investors like to call an “Alternative Bank.” This BDC provides credit solutions to private middle-market U.S. companies with annual revenue of between $10.0 million and $2.5 billion and annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of $50.0 million to $100.0 million. (Source: “FS KKR Capital Corp. Investor Presentation February 2025,” FS KKR Capital Corp, last accessed March 4, 2025.)
FS KKR Capital invests primarily in senior secured debt, with roughly 58% of investments being first-lien senior secured debt. It also seeks to invest in second-lien secured loans and, to a lesser extent, subordinated, or mezzanine, loans.
Of the BDC’s total investments, 89% are floating rate. Meanwhile, the weighted average yield on accruing debt investments is 11%.
FS KKR Capital makes money through the annual recurring interest income from its investments.
What kinds of companies does FSK invest in?
Well, let’s start off with what it doesn’t invest in. That includes start-up companies, turnaround situations, and companies with speculative business plans.
FS KKR Capital’s current portfolio consists of 214 companies across 24 different industries, with $14.2 billion in assets under management. It is actually the third largest publicly traded BDC when it comes to assets under management.
By sector, FS KKR Capital’s biggest exposure is in software & services (16.2%), followed by commercial & professional services (12.8%) and capital goods (12.7%). Some of the other sectors the Alternative Bank invests in include financial services, insurance, media & entertainment, pharmaceuticals, and transportation.
Fourth-Quarter Earnings Beat
For the fourth quarter ended December 31, 2024, FS KKR reported net investment income of $0.61 per share, down from $0.77 per share in the third quarter of 2024. (Source: “FS KKR Capital Corp. Announces Fourth Quarter and Full Year 2024 Results; Declares First Quarter 2025 Distribution of $0.70 per share,” FS KKR Capital Corp, February 26, 2025.)
The BDC reported adjusted net investment income of $0.66 per share, down from $0.74 in the quarter ended September 30, 2024. Wall Street was looking for adjusted net investment income of $0.65 per share.
For the year ended December 31, 2024, FS KKR reported net investment income of $2.90 per share and adjusted net income of $2.88 per share.
Commenting on the results, Michael C. Forman, the BDC’s chief executive officer and chairman, said, “As we conclude the fourth quarter of 2024, we are pleased with our continued strong performance, highlighted by disciplined capital deployment, portfolio stability, and a well-laddered, diversified capital structure. Looking ahead, our $4.8 billion of available liquidity will serve as a significant strength as private market activity continues to build.”
Fourth-Quarter Dividend of $0.70/Share
As an Alternative Bank, FS KKR is good at making money. For example, it generated $1.9 billion in free cash flow (FCF) in 2024, up significantly from $1.38 billion in 2023.
Why is FCF important?
Companies use it to pay dividends, reduce debt, and make capital expenditures.
In the fourth quarter, FS KKR Capital declared a dividend of $0.70 per share. This consists of a base distribution of $0.64 per share and supplemental distribution of $0.06 per share. The dividend will be paid on or about April 2, 2025 to stockholders of record as of the close of business on March 19, 2025.
At current prices, this works out to an annual forward distribution of $2.80 per share for a current yield of 12.11%.
FSK shareholders have become accustomed to quarterly supplemental distribution. FS KKR Capital paid one in the third quarter of 2022 and then in every quarter since the start of 2023. Over that same time frame, the BDC has also paid out five special dividends. (Source: “Dividend and Split History,” FS KKR Capital Corp, last accessed March 4, 2025.)
FSK Stock Hits Record High
Over the last year, FSK stock has been on a pretty strong run, advancing approximately 30%. On February 19, 2025, the stock hit a fresh intraday high of $24.10 per share. It has given up some ground to short-term profit-taking and concerns about President Trump’s newly implemented tariffs, but FSK continues to trade near record levels, at $22.98 per share.
That puts FSK up:
- 7.5% over the last three months
- 14% over the last six months
- 29.5% year over year
Chart courtesy of StockCharts.com
The Lowdown on FS KKR Capital Corp
FS KKR Capital Corp is a great BDC with 58% of its investments covered by senior secured debt and 89% of debt investments being floating rate. It has reported solid results all year long, including $0.73 per share of adjusted net investment income in the first quarter, $0.75 per share in the second quarter, $0.74 in the third quarter, and $0.66 in the fourth quarter.
The outlook for FS KKR remains solid, since November, it has completed $700.0 million in a public offering of unsecured notes due 2030. A strengthened balance sheet and strong economic underpinning should help juice FS KKR’s mergers and acquisitions activity.
This is why a growing number of institutional holders are taking a position in FS KKR. Of the 580 institutions with a 30.21% stake in outstanding shares, the biggest include Van Eck Associates Corporation, Commonwealth Equity Services, and Morgan Stanley. (Source: “FS KKR Capital Corp. (FSK),” Yahoo! Finance, last accessed March 4, 2025.)
