Capital Southwest Corp: Outlook Bullish for This 11.05%-Yielder
March 14, 2025
CSWC Stock Has Paid 9 Consecutive Supplemental Dividends
Stocks have been experiencing prolonged volatility as President Donald Trump wavers on and off with his tariff threats against Canada and Mexico.
Most recently, on March 4, President Trump imposed 25% tariffs on imports from Canada and Mexico, but the next day, he granted a one-month reprieve.
If there’s one thing big business doesn’t like, it’s uncertainty. The same thing goes for stocks and anyone invested in the stock market. It doesn’t help that President Trump also said recently that a tariff related recession isn’t out of the cards either. (Source: “Trump says a transition period for the economy is likely: ‘You can’t really watch the stock market’,” CNBC, March 10, 2025.)
However, a recession is far from a certainty. And many economists think that ongoing tariff talk has already been priced into the stock market, which has seen the S&P 500 and Nasdaq give up all their gains since the November election.
The fact is, the U.S. economy remains resilient and, with interest rates expected to come down over the next two years, business conditions in this country remain robust. And that’s good news for business development companies (BDCs) like Capital Southwest Corp (NASDAQ:CSWC).
Capital Southwest Corp is a BDC that provides capital to lower middle market companies in the U.S. to grow their operations. It invests anywhere from $5.0 million to $70.0 million in financing to companies with $3.0 to $25.0 million in earnings before interest, taxes, depreciation, and amortization (EBITDA), a strong track record of performance, a stable customer supplier performance, sustainable market positions, and strong free cash flow conversion. (Source: “Investor Relations February 2025,” Capital Southwest Corp, last accessed March 10, 2025.)
Over the last 12 months, Capital Southwest has committed approximately $673.0 million in direct debt and equity financings across 61 different lower middle-market portfolio companies, including 22 new investments and 39 add-on financings.
The BDC invests in companies in industrial manufacturing and services, health-care products and services, business services, specialty chemicals, food and beverage products and services, tech-enabled services, and software-as-a-service models. (Source: “Investment Portfolio,” Capital Southwest Corp, last accessed March 10, 2025.)
Capital Southwest Corp Reports Q3 Earnings Beat
Capital Southwest Corp has been reporting strong total investment income (revenue) growth over the last number of years, growing from $62.0 million in 2020 to a record $178.1 million in fiscal 2024. The BDC is on track to beat that number in fiscal 2025. It has seen profits grow over that same period of time as well, from $1.57 per share in 2020 to $2.70 per share in 2024.
For the third quarter of fiscal 2025, ended December 31, 2024, Capital Southwest reported total investment income (revenue) of $51.9 million, up seven percent from $48.5 million in the same prior-year period. (Source: “Capital Southwest Announces Financial Results for Third Fiscal Quarter Ended December 31, 2024 and Announces Increase in Total Dividends to $0.64 per share for the Quarter Ending March 31, 2025,” Capital Southwest Corp, February 3, 2025.)
Third-quarter net investment income (earnings) were up five percent on an annual basis at $30.3 million, or $0.63 per share. Wall Street was looking for earnings of $0.62 per share.
For the first nine months of fiscal 2025, total investment income rallied more than 15% to $152.0 million. Total net investment income jumped 12% to $90.3 million, or $1.92 per share.
Commenting on the results, Bowen Diehl, Capital Southwest’s president and chief executive officer, said, “The December quarter was an active quarter for Capital Southwest, with approximately $318 million of new committed originations.
“Our portfolio continued to generate significant income for our shareholders, producing $0.64 of pre-tax net investment income per share for the quarter, which outearned both our $0.58 per share regular dividend and our $0.05 per share supplemental dividend paid for the quarter.”
Total Distribution Upped to $0.64/Share
For the fourth quarter ended March 31, 2025, Capital Southwest’s board increased its total dividends for the quarter to $0.64 per share. This included a regular dividend of $0.58 per share and supplemental dividend of $0.05 per share. In the fourth quarter of fiscal 2024, the BDC paid total dividends of $0.63 per share. (Source: “Dividends,” Capital Southwest Corp, last accessed March 10, 2025.)
The company’s current annual distribution is $2.54 per share for a forward annual distribution of 11.05%. This is slightly higher than Capital Southwest’s five-year average dividend yield of 10%.
In its third quarter financial release, management said that, while future dividend declarations are at the discretion of its board of directors, it is the BDC’s intent to continue to distribute quarterly supplemental dividends in the near future.
CSWC Stock Has Great Upside
CSWC stock traded at a 52-week high of $27.23, just below its record $28.41 reached in October 2021. It has given up some ground since then, trading hands at $22.73 per share.
While CSWC entered a death cross in November—that’s a bearish technical crossover where the 50-day moving average (MA) crosses below the 200-day MA—recent moves in the stock could lead to that trend reversing.
CSWC’s 50-day MA is moving higher, while the 200-day MA is sliding lower. Should the 50-day MA cross over the 200-day MA, it would form a golden cross. This is a bullish technical crossover where the 50-day MA is above the 200-day MA. Holding this formation could see the stock move towards its record high.
Wall Street thinks CSWC stock is heading in the right direction, providing a 12-month share price target of $25.00 per share. This points to potential upside of up to eight percent.
Chart courtesy of StockCharts.com
The Lowdown on Capital Southwest Corp
Capital Southwest Corp is a great BDC with a growing portfolio of lower middle market U.S. companies. In the third fiscal quarter, 98% of its portfolio was made up of first-lien senior secured debt. The BDC added $313.4 million in new committed credit investments during the quarter, with a weighted average yield on debt investments of 12.1%.
Capital Southwest also increased its total dividend to $0.63 per share, with the plan to continue to distribute quarterly supplemental dividends for the foreseeable future.
More free money is great news to the 189 institutions that hold a 31.54% stake in Capital Southwest Corp’s outstanding shares. Three of CSWC’s biggest holders include Van Eck Associated Corp, Sanders Morris Harris LLC, and Two Sigma Advisors, LP. (Source: “Capital Southwest Corporation (CSWC),” Yahoo! Finance, last accessed March 10, 2025.)
