Saratoga Investment Stock: 12.4%-Yielding BDC Increases Quarterly Payout
September 25, 2024
Saratoga Investment Has Increased Dividend for 4 Years
Some investments are designed specifically for income investors. I’m talking about stocks that exist primarily to reward investors with big dividends, which includes business development companies (BDCs).
BDCs, or what we like to call “Alternative Banks,” provide small- and mid-sized companies with financing…the kind of financing with which big banks didn’t want to waste their time. But small- and mid-sized businesses are the economic backbone of the country, and Congress knows this.
In an effort to stimulate economic growth, Congress legislated BDCs into existence back in the early 1980s. Now smaller businesses are able to access capital, and investors are on the receiving end of a frothy dividend.
So, why is this?
BDCs like Saratoga Investment Corp (NYSE:SAR) have to legally distribute at least 90% of their taxable income to shareholders as dividends.
And, like all good BDCs, Saratoga is great at making money and rewarding investors. The company has increased its annual dividend for the last four consecutive years, currently sporting a dividend yield of 12.2%. Saratoga Investment stock has also been doing well of late, too, up more than 10% since August.
What’s the big deal here?
Even though interest rates are expected to start coming down in September, they are still going to remain higher than they were before the 2020 health crisis.
And high, but not onerously high, interest rates, are great for Alternative Banks, especially those with a lot of floating-rate loans. Rising interest rates are also good for BDCs that have a lot of floating-rate loans. On average, 80% of loans in a typical BDC profile are floating rate.
Saratoga does a little bit better than the average BDC; 99.4% of the loans in its portfolio have floating interest rates. (Source: “Fiscal First Quarter 2025 Shareholder Presentation,” Saratoga Investment Corp, July 10, 2024.)
Saratoga is a BDC that specializes in providing loans to middle-market companies. It typically makes $5.0-million to $75.0-million investments in leverages and management buyouts, recapitalizations, debt refinancing, growth financing, acquisition financing, and transitional financing. (Source: “Investment Profile,” Saratoga Investment Corp, last accessed September 9, 2024.)
It typically invests in companies with:
- Revenue of $8.0 million to $250.0 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of $2.0 million or greater
- Strong margins and free cash flow
- Recurring revenues and a stable historical performance
- Modest capital expenditure and working capital requirements
- A leading market position or niche with competitive advantages
- Growth prospects in healthy end markets
Saratoga Investment’s loan portfolio includes first lien/mezzanine, first lien/second lien, and unitranche debt. Its investment quality remains strong: 98% of credits are of the highest quality and 86% of investments are first lien.
It’s important to understand what kind of loans a BDC has in its portfolio. A BDC with a lot of “senior” debt is first in line to get its money back. “Mezzanine” lenders get paid second. Meanwhile, “preferred” and “equity” investors usually receive only a fraction of their original investment back in the event of bankruptcy.
Saratoga has made investments across 43 distinct industries, including: aerospace, health care, consumer services, financial services, logistics and distribution, software and technology services, specialty chemical, and media and telecommunications.
Reports Strong Sequential Results
For the first quarter of fiscal 2025 ended May 31, 2024, Saratoga reported stable assets under management (AUM) of $1.09 billion, up slightly from $1.08 billion in the fourth quarter of fiscal 2024 ended February 29, 2024. (Source: “Saratoga Investment Corp. Announces Fiscal First Quarter 2025 Financial Results,” Saratoga Investment Corp, July 9, 2024.)
Investment income, or portfolio income, grew sequentially and on an annual basis to $38.6 million. Net investment income (NII) came in at $1.05 per share versus $1.35 last year and $0.94 for last year’s fourth quarter.
Adjusted NII was $1.05 per share, compared to $1.08 per share in the same period last year and $0.94 per share in the previous quarter.
18th Straight Quarter-Over-Quarter Increase
Thanks to the company’s strong earnings and stable credit performance, Saratoga Investment stock is able to return substantial capital to shareholders in the form of a growing dividend. In August, Saratoga declared a quarterly dividend of $0.74 per share, or $2.96 on an annual basis, for a current forward yield of 12.24%.
Of note, this most recent quarterly distribution represents Saratoga Investment stock’s 18th consecutive quarterly dividend increase in a row. The $0.74 per share dividend represents a 4.2% increase over the $0.71 per share paid out in the second quarter of fiscal 2024. It also represents a 37% increase over the past two years. (Source: “Saratoga Investment Corp. Announces Quarterly Dividend of $0.74 per Share for the Fiscal Second Quarter Ending August 31, 2024,” Saratoga Investment Corp, August 22, 2024.)
Commenting on the increase, Christian L. Oberbeck, the company’s chairman and chief executive officer, said, “The highly diversified nature of our asset portfolio, the solid overall performance of our investments during the recent stable interest rate environment, and the current over-earning of our dividend has allowed us to maintain a strong dividend for the quarter, with industry leading dividend yield and dividend coverage.”
Saratoga Investment stock has a long history of raising its dividend. Since launching its dividend program in the second quarter of fiscal 2015 through the third quarter of fiscal 2020, the company increased its dividend by 211%, going from $0.18 per share to $0.56 per share.
Saratoga suspended its dividend for one quarter during the health crisis. Since reinstating its dividend in the first quarter of fiscal 2021, Saratoga Investment stock’s payout has increased 85% from $0.40 per share to $0.74 per share.
Saratoga Investment Stock Poised to Hit New Record High?
Typically, an ultra-high-yield dividend is pegged with a stock that is depressed. That isn’t the case with Saratoga Investment. As of this writing, (September 9), SAR stock is up 9.5% over the last month, 9.0% over the last six months, and 7.0% over the last year.
Currently trading at $24.40, Saratoga Investment stock has room to run. It needs to climb just 2.7% to reach its June 2023 all-time record high of $25.07 per share. Wall Street is confident the stock will breach that level, with analysts providing a 12-month share price target range of $25.04 to $29.00 per share.
Chart courtesy of StockCharts.com
The Lowdown on Saratoga Investment Stock
Saratoga Investment Corp is a great BDC with a growing, diversified portfolio. It has an attractive risk portfolio: 98% of credits are of the highest quality, 86% of investments are first lien, and 99.4% of the loans in its portfolio have floating interest rates.
The company’s overall solid performance is reflected in its continued strong key results in this past quarter, including sequential adjusted NII per share growth of 12% to $1.05, current AUM of $1.096 billion, and 18 consecutive quarterly dividend increases.
