Announces Another Supplemental Dividend for FS KKR Capital?
Today’s income pick in the spotlight is FS KKR stock.
Business development companies like FS KKR Capital Corp (NYSE:FSK), or what we like to call “Alternative Banks” here at Income Investors, are the lifeline to small- and mid-sized businesses looking to grow their operations.
As a specialty financial company, a BDC invests in debt, including senior secured debt, subordinated debt, unsecured debt, and, in some cases, common stock.
The term “small- and mid-sized companies” is a bit misleading; we’re not talking about corner stores or barber shops. When it comes to Alternative Banks, “small- and mid-sized companies” mean businesses that generate anywhere from $50.0 million to $250.0 million.
And a lot of well-known businesses have benefitted from early funding from BDCs, including Facebook, Etsy, Crowdstrike, and Fastly.
Alternative banks aren’t just great for smaller businesses; they’re also a lifeline for income-starved investors. Those that register as regulated investment companies (RICs) have to legally distribute 90% of their taxable income to investors to be exempt from federal taxes.
In essence, Alternative Banks are designed to be dividend machines, and can often have dividend yields as high as 10% or 15%, or more.
FS KKR Capital Corp is a BDC that provides credit solutions to private, middle-market U.S. companies with annual revenue of between $10.0 million and $2.5 billion with annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of $50.0 million to $100.0 million. (Source: “FS KKR Capital Corp. Debt Investor Presentation November 2024,” FS KKR Capital Corp, last accessed December 3, 2024.)
It invests primarily in the senior secured debt with 69% of investments being first-lien senior secured debt. FS KKR also seeks to invest in second-lien secured loans and, to a lesser extent, subordinated loans, or mezzanine loans. Of its total investments, 89% are floating rate.
The BDC makes money through the annual recurring interest income from its investments.
What kind of companies does FSK KKR invest in?
Let’s start off with what it doesn’t invest in. That includes start-up companies, turnaround situations, and companies with speculative business plans.
FS KKR’s current portfolio consists of 217 companies across 24 different industries with a total investment at fair value of $13.9 billion.
By sector, the BDC’s biggest exposure is in software & services (16.1%), followed by commercial & professional services (13.3%) and capital goods (13.3%). Some of the other sectors FS KKR invests in include financial services, insurance, media & entertainment, pharmaceuticals, and transportation.
Third-Quarter Earnings Beat
For the third quarter ended September 30, 2024, FS KKR Capital reported net investment income of $0.77 per share, the same as it reported in the prior quarter. The BDC reported adjusted net investment income of $0.74 per share, down slightly from $0.75 per share in the second quarter ended June 30, 2024. (Source: “FS KKR Capital Corp. Announces Third Quarter 2024 Results,” FS KKR Capital Corp, November 6, 2024.)
The Alternative Bank’s earnings per share jumped 54% on a quarterly basis to $0.57 per share from $0.37 per share in the second quarter.
Commenting on the results, Michael C. Forman, FS KKR’s chairman and chief executive officer, said, “During the third quarter FSK outperformed its public guidance by earning $0.74 per share of Adjusted Net Investment Income.”
Thanks to strong cash generation, FS KKR’s board declared a third-quarter cash distribution of $0.70 per share. This consists of a base distribution of $0.64 per share and supplemental distribution of $0.06 per share. At current prices, this works out to an annual forward distribution of $2.80 per share for a current yield of 12.74%.
FS KKR stock investors have come to almost expect a quarterly supplemental distribution. The company paid one in the third quarter of 2022, and then in every quarter since the start of 2023. (Source: “Dividend and Split History,” FS KKR Capital Corp, last accessed December 3, 2024.)
FS KKR Stock Hits Record High
While some investors look to BDCs to provide them with a reliable, high-yield distribution, FS KKR stock has also been rewarding buy-and-hold shareholders with pretty massive stock market gains.
On November 29, FS KKR stock hit a record intraday high of $22.39 per share. The stock continues to trade near that level.
As of December 3, FS KKR stock is trading up:
- 10.4% over the last six months
- 19.5% year to date
- 24% year over year
Chart courtesy of StockCharts.com
The Lowdown on FS KKR Stock
FS KKR Capital Corp continues to be a great BDC, with 65% of its investments covered by senior secured debt and 89% of debt investments being floating rate. The BDC has reported solid results all year long, including $0.73 per share of adjusted net investment income in the first quarter, $0.75 per share in the second quarter, and $0.74 in the third quarter.
The outlook for FS KKR remains solid. It originated approximately $1.1 billion of new investments in the third quarter and further reduced its non-accrual investments. Subsequent to the end of the third quarter it completed a public offering of $600.0 million in unsecured notes due 2030.
A strengthened balance sheet and strong economic underpinning should help juice FS KKR’s mergers & acquisitions activity.
This, of course, is also good news for the 547 institutions that collectively hold a 28.55% stake in FS KKR stock. The three biggest holders are Van Eck Associated Corporation (2.05% stake), Commonwealth Equity Services, LLC (1.53% stake), and Morgan Stanley (1.28% stake). (Source: “FS KKR Capital Corp. (FSK),” Yahoo! Finance, last accessed December 3, 2024.)