Runway Growth Finance Stock: This Small BDC’s Yielding 15.18%
February 13, 2025
This Great Alternative to Bonds Could Gain 30%
Today’s income stock in focus is Runway Growth Finance stock.
Interest rates are expected to head lower by 2026 , so the previously high yields offered by treasury bills and money market instruments should also be going much lower.
Moreover, with core inflation still running at over 2.5%, the real rate of return is dismal.
For conservative income investors, this means sourcing other higher-yielding instruments. And that’s where a business development company (BDC) could come in.
A BDC is structured so that the investment income generated from the debt and equity investments is paid as dividends to investors. A BDC is required to distribute a minimum of 90% of its taxable income and tax-exempt interest annually.
That’s where a small BDC like Runway Growth Finance Corp (NASDAQ:RWAY) could make sense in your income portfolio. The company has a small market cap of $425.3 million, but it has been delivering a nice stream of dividends to investors.
The specialty finance company originates and invests in first-lien, senior, secured loans in late-stage and growth companies. Its investments are found in technology, health-care and information services, business services, financial services, and consumer services and products.
Runway Growth Finance’s objective is to maximize the total return to investors via producing income from debt investments and capital gains. The BDC’s loans generally range from $10.0 million to $100.0 million, or even higher, depending on capital raises.
Since its beginnings, Runway has made 82 transactions, funded $2.2 billion, and committed $2.8 billion in investments. (Source: “Investor Fact Sheet November 2024,” Runway Growth Finance Corp, last accessed February 11, 2025.)
As of September 30, Runway Growth Finance Corp managed total investments with a fair value of $1.07 billion, compared to $1.01 billion in the same period of 2023. (Source: “Form-10K,” Runway Growth Finance Corp, last accessed February 11, 2025.)
On the chart, Runway Growth Finance stock’s price of $11.40 is above its 52-week low of $9.87, but well below its 52-week high of $13.74 and the record $14.92 in March 2022. This implies potential for capital appreciation.
Runway Growth Finance stock recovered its 50-day moving average (MA) of $10.99 and 200-day MA of $10.61, and has now entered a bullish golden cross. This technical crossover signals possible upside moves ahead. Next up is the record high, representing a potential 30% upside move.
Chart courtesy of StockCharts.com
Runway Growth Finance Stock Rallies Despite Soft Third Quarter
Runway Growth reports revenues as total investment income and earnings as net investment income.
The BDC’s results on both the top and bottom lines have been strong.
Total investment income jumped to $164.1 million in 2023, up 52.3% versus $107.8 million in 2022 and 130.8% from $71.1 million in 2021. (Source: Runway Growth Finance Corp, op. cit.)
In the third quarter of 2024, Runway Growth Finance delivered total investment income of $36.7 million, down from $43.8 million in 2022 but higher than the $27.0 million in 2021.
The BDC’s soft third quarter is reflected in the estimates. Analysts expect the company to report lower total investment income of $147.0 million in 2024 and $140.6 million in 2025. (Source: “Runway Growth Finance Corp (RWAY),” Yahoo! Finance, last accessed February 11, 2025.)
On the bottom line, Runway Growth saw its net investment income rise to $1.93 per share in 2023, compared to $1.46 per share in 2022 and $1.30 per share in 2021.
The BDC’s third quarter saw a decline in net investment income due to the drop in the total investment income. Its net investment income fell to $0.41 per share in the third quarter of 2024, versus $0.54 per share in the third quarter of 2023. This was $0.04 per share short of the consensus and reflected in the estimates.
Analysts expect Runway Growth Finance to report lower net investment income of $1.67 per share in 2024, followed by $1.60 per share in 2025. (Source: Yahoo! Finance, op. cit.)
A look at the balance sheet shows $548.7 million in total debt, which is what you would expect with a BDC. The total debt to equity ratio of 108.4% is manageable at this point. (Source: Yahoo! Finance, op. cit.)
Dividends 42% Higher Versus 2022
Runway Growth Finance stock’s last dividend was $0.40 per share in November, bringing the total for 2024 to $1.79 per share. This was a slight drop from $1.81 per share in 2023, but 42% above the $1.26 per share in 2022.
The forward yield is 15.18% based on the BDC’s November dividend, or 15.7% based on the total dividends paid in 2024.
Given the expected decline in net investment income in 2025, the company could lower its dividends, but I expect the yield to remain on the higher end at well above the treasury rates.
Runway Growth Finance stock’s expected payout ratio of 100% based on the 2025 consensus is not out of line for a BDC.
The Lowdown on Runway Growth Finance Stock
For a small BDC, Runway Growth Finance stock has relatively high institutional ownership of 48.1%. (Source: Yahoo! Finance, op. cit.)
There is some concern regarding lower earnings in 2025, but based on the expected payout ratio, I expect that this BDC’s dividends will remain near the current levels.
Runway Growth Finance stock is ideal for income investors wanting a higher yield along with the potential of capital appreciation.
