PennantPark Investment Corp: Overlooked 13.7%-Yielder Up 27% YoY
October 29, 2024
Get Paid Monthly with PennantPark Investment Corp
Business development companies (BDCs) like PennantPark Investment Corp. (NYSE:PNNT) are growing in popularity with both small, private companies and passive income investors.
First, cash-starved companies love BDCs because they provide them with much-needed capital to grow their businesses. And right now, solid economic data and lower interest rates should result in BDCs issuing more debt.
Investors, meanwhile, love BDCs because of their sky-high dividend payouts. Like real estate investment trusts (REITs), BDCs, or what we like to call “Alternative Banks” here at Income Investors, have to distribute at least 90% of their taxable income to shareholders through dividends.
Why can they provide dividend payouts far greater than what the big banks do?
Because the private companies to which they lend are considered small by Wall Street standards, generating up to $100.0 million in annual revenue, they are seen as riskier places to invest. As a result, alternative banks can charge higher interest rates. This means more money and higher dividend payouts.
Yes, interest rates are coming down, but they are still well above the pre-pandemic levels of 1.5%. And interest rates are expected to remain above those pre-2020 health crisis levels. Factor in a soft economic landing and it’s a perfect scenario for BDCs.
About PennantPark Investment Corp
Pennntpark Investment Corp is a private equity fund that focuses on companies owned by middle-market private equity sponsors with a track record of supporting their portfolio companies. (Source: “Investor Presentation, June 30, 2024,” PennantPark Investment Corp, last accessed October 21, 2024.)
Why middle-market companies?
The U.S. middle market includes nearly 200,000 companies, generates $10.0 trillion in annual revenue (1/3 of the U.S. economy), and is the world’s fifth largest economy on a standalone basis.
Its core focus is U.S.-based companies, where it invests between $10.0 million and $100.0 million across the capital structure (senior secured loans, subordinated debt, and other investments) in companies with earnings of $10.0 million to $50.0 million, strong cash flow, and growth potential.
As of September 30, PennantPark’s overall portfolio consisted of 129 companies with an average investment size of $7.8 million (excluding U.S. government securities), and had a weighted average yield on interest-bearing debt investments of 13%.
Some of the industries targeted by PennantPark include health care, consumer products, financial services, telecommunications, aerospace and defense, hotels, gaming and leisure, and insurance.
PennantPark also has a joint venture with Pantheon, a leading global alternative private markets investor. The PennantPark Senior Loan Fund, LLC (PSLF) joint venture invests in first-lien debt of middle market companies, consistent with the overarching investment philosophy of PennantPark.
The JV structure allows third-party investors (such as Pantheon) and PNNT shareholders to capture returns that are typically significantly higher than what the underlying senior loans generate.
As of September 30, 2023, PSLF’s portfolio totaled $804.2 million, consisted of 90 companies with an average investment size of $8.9 million, and had a weighted average yield on interest-bearing debt investments of 12.1%.
Another Solid Quarter of Net Investment Income
For the third quarter of fiscal 2024, ended June 30, PennantPark reported revenue (investment income) of $37.0 million, down from $45.0 million in the same period last year. (Source: “PennantPark Investment Corporation Announces Financial Results for the Quarter Ended June 30, 2024,” PennantPark Investment Corp, August 7, 2024.)
The company reported net investment income of $15.7 million, or $0.24 per share, down from $22.9 million, or $0.35 per share, in the same period last year.
For the third fiscal quarter of 2024 PennantPark invested $163.1 million in 11 new and 42 existing portfolio companies with a weighted average yield on debt investments of 12%.
For the three months ended June 30, 2024, sales and repayments of investments totaled $132.9 million (excluding U.S. government securities).
For the three months ended June 30, 2024, PSLF invested $56.0 million in five new and seven existing portfolio companies at weighted average-yield interest-bearing debt investments of 11.5%.
PSLF’s sales and repayments of investments for the same period totaled $54.9 million.
Commenting on the results, Arthur Penn, PennantPark’s chairman and chief executive officer, said, “We are pleased to announce another quarter of solid Net Investment Income. Our earnings stream continues to be robust and is driven in part by the excellent returns generated by our PSLF Joint Venture.”
Declares Monthly Distribution of $0.08 Per Share
Thanks to its robust earnings stream, PennantPark is able to provide investors with a reliable monthly distribution. If you look at the chart below, it might look like the company cut its payout (red line) in late 2023, but it didn’t. That’s when PennantPark switched from a quarterly dividend to a monthly dividend.
In June, the BDC increased its monthly dividend payout by 14.3% to $0.08 per share. It has maintained that payout since then, for an annual distribution of $0.96 per share, leading to a forward yield of 13.73%. (Source: “PennantPark Investment Corporation Announces Monthly Distribution of $0.08 per Share,” PennantPark Investment Corp, October 21, 2024.)
PennantPark Stock Hits Record High
In addition to a reliable ultra-high-yield distribution, PennantPark has also provided shareholders with outsized gains, including a new record high in July. PNNT stock has given up some ground to profit-taking but it continues to trade near those levels.
Currently trading hands at $6.95 per share, PNNT stock is up:
- 5.8% over the last six months
- 12% year to date
- 27.8% year over year
The outlook for PNNT stock remains robust, too, with analysts providing a 12-month share price target of between $7.00 and $8.00 per share. This points to potential upside of up to 15%. The higher target of $8.00 would also put PNNT stock into record territory.
Chart courtesy of StockCharts.com
The Lowdown on PennantPark Investment Corp
PennantPark Investment Corp is a great BDC with a strong underwriting process that helps it invest in strong middle-market companies. An area underserved by banks and large investment managers.
As a result, PennantPark is able to negotiate superior loan structures with more favorable pricing, which results in generating excess returns for its investors. And, with more than 90% of its debt portfolio floating rate, it is able to generate lots of cash, which it passes along to shareholders through its reliable monthly distribution.
