Why FSK Stock Recently Hit a Record High
A high interest rate environment isn’t great for people or businesses looking to borrow money, but it’s great for lenders. This includes business development companies (BDCs), or what we like to call “alternative banks” here at Income Investors.
BDCs are like traditional financial institutions, but they tend to invest in privately owned, small and medium-sized companies that get overlooked by the big banks. Like venture capital funds or private equity funds, BDCs generate income and capital gains when the companies they invest in are solid.
BDCs don’t just help jump-start private businesses, they also provide income investors with pretty big dividends. That’s because they legally have to distribute at least 90% of their taxable income to shareholders in the form of dividends.
On top of that, the better BDCs not only increase their distributions on a regular basis, but they also pay special dividends.
That’s where FS KKR Capital Corp (NYSE:FSK) comes in. It’s a bullish alternative bank that has been increasing its base distributions and paying special dividends.
Management is excited about the future, believing that FS KKR Capital Corp’s conservatively structured balance sheet and defensively positioned lending portfolio will allow the company to continue delivering strong results.
Why?
High interest rates will continue to provide tailwinds to the BDC’s net investment income. That’s because 90% of its debt investments have floating interest rates. It’s also why the company has been able to periodically increase its base distribution and pay special dividends.
About FS KKR Capital Corp
FS KKR Capital provides credit solutions to private upper-middle-market U.S. companies with annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of $50.0 million to $150.0 million. It focuses on companies with more than $100.0 million of annual EBITDA. (Source: “Debt Investor Presentation: February 2024,” FS KKR Capital Corp, last accessed April 24, 2024.)
The firm primarily invests in senior secured debt. It also invests in second-lien secured loans and, to a lesser extent, subordinated loans or mezzanine loans.
It’s important to know about the different types of loans. A BDC with a lot of senior debt stands 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 a bankruptcy.
The majority (67%) of FS KKR Capital Corp’s portfolio comprises senior secured loans and senior secured debt.
What kind of companies does the BDC invest in? Let’s start with what it doesn’t invest in. That includes start-up companies, turnaround situations, and companies with speculative business plans.
FS KKR Capital Corp’s portfolio currently consists of 204 companies in 24 different industries. The portfolio has total investments at fair value of $14.6 billion.
By sector, the portfolio’s biggest exposure is software and services (16.9%), followed by capital goods (13.5%), commercial and professional services (12.5%), and health-care equipment and services (11.7%).
Some of the other sectors it invests in are financial services; insurance; media and entertainment; and transportation.
Management Reported Another Successful Year
For full-year 2023, FS KKR Capital reported net investments of $3.18 per share, compared to $3.05 per share in 2022. Its adjusted net investment income in 2023 was $3.11 per share, versus $2.93 per share in 2022. (Source: “FS KKR Capital Corp. Announces Fourth Quarter and Full Year 2023 Results,” FS KKR Capital Corp, February 26, 2024.)
Commenting on the results, Michael C. Forman, FS KKR Capital’s CEO and chairman, said, “2023 was another successful year for FSK as we generated an annual return on equity of 10% and provided shareholders with $2.95 per share of total distributions.” (Source: Ibid.)
He continued, “Focusing on 2024, we expect to see an increase in private market transaction activity and FSK currently expects distributions to total a minimum of $2.90 per share.”
FS KKR Capital Stock Pays Regular & Special Dividends
Thanks to high cash generation, FS KKR Capital Corp was able to pay a distribution of $0.70 per share in January. That consisted of a regular quarterly dividend of $0.64 and a special dividend of $0.06. (Source: “Dividend Information,” FS KKR Capital Corp, last accessed April 24, 2024.)
In February, FSK stock paid a special dividend of $0.05 per share.
In April, the BDC paid $0.76 per share, consisting of a regular quarterly distribution of $0.64 plus two special dividends of $0.06 each.
As of this writing, that works out to a yield of 14.42%.
In addition to the dividends, thanks to the company’s solid financial results, FS KKR Capital stock has been rewarding shareholders with big capital gains. On January 4, the stock hit a new record high of $20.18 per share.
FSK stock continues to trade near that range. As of this writing, it’s up by 10% over the last six months and 20.5% year-over-year.
Conservative Wall Street analysts expect FS KKR Capital stock to hit new record highs over the coming quarters. They’ve provided a 12-month share-price target of $22.00. This points to gains of up to 13.5%.
Chart courtesy of StockCharts.com
The Lowdown on FS KKR Capital Corp
FS KKR Capital Corp is a wonderful BDC with 67% of its investments covered by senior secured debt and 90% of its debt investments having floating interest rates.
The company reported solid full-year 2023 financial results and has paid numerous special dividends. Moreover, management expects FSK stock’s distributions to total a minimum of $2.90 per share in 2024, up from its trailing 12-month distribution of $2.56 per share.