FS KKR Stock: Bullish 13.7%-Yielder Trading at Record Levels
July 30, 2024
FS KKR Capital Corp Poised to Announce Another Special Dividend?
Growing, cash-strapped companies like business development companies (BDCs), because they are a source of much-needed capital to expand their businesses. A lot of well-known companies or web platforms have benefitted from the help of BDCs, including Facebook, YouTube, and Etsy.
Investors like BDCs because they loan out capital at higher-than-average interest rates, and, because of a corporate loophole, need to return at least 90% of earnings to shareholders. And that can result in ultra-high-dividend yields above 10%. Better still, some BDCs not only provide a growing distribution, but they also pay out regular special dividends.
And that’s what you’re getting with FS KKR Capital Corp (NYSE:FSK).
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 and annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of $50.0 million to $100.0 million. (Source: “FS KKR Capital Corp. NYSE: FSK) Investor Presentation May 2024,” FS KKR Capital Corp, last accessed July 24, 2024.)
FS KKR Capital invests primarily in senior secured debt, with 89.4% of debt investments being floating rate and the remaining 10.6% being fixed rate. It also seeks to invest in second lien secured loans and, to a lesser extent, subordinated loans, or mezzanine loans.
It’s important to understand the different 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 bankruptcy.
The majority (65.2%) of FS KKR’s portfolio consists of senior secured loans and senior secured debt.
What kind of companies does FS KKR Capital 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 Capital’s current portfolio consists of 205 companies across 24 different industries with a total investment at fair value of $14.2 billion.
By sector, the BDC’s biggest exposure is in software & services (16.5%), followed by capital goods (14%), and commercial & professional services (13.8%). Some of the other sectors FS KKR Capital invests in include financial services, insurance, media & entertainment, pharmaceuticals, and transportation.
Another Solid Quarter, Another Special Dividend
For the first quarter ended March 31, 2024, FS KKR Capital reported net investment of $0.76 per share, compared to $0.71 per share in the first quarter of 2023. Adjusted net investment income was $0.73 per share, versus $0.75 per share in the same prior-year period. (Source: “FS KKR Capital Corp. Announces First Quarter 2024 Results,” FS KKR Capital Corp, May 8, 2024.)
Earnings per share almost doubled on a sequential basis to $0.62 from $0.32 for the quarter ended December 31, 2024.
Thanks to strong cash generation, FS KKR’s board declared a second-quarter cash distribution of $0.70 per share and special distribution of $0.05 per unit, for a combined second-quarter distribution of $0.75 per share. At current prices, this works out to an annual forward distribution of $2.80 per share for a current yield of 13.71%.
FS KKR Capital has declared an extra or special dividend every quarter since the end of 2022. The company will announce its second-quarter results on August 6, 2024 after the markets close. We’ll find out then if another special dividend is in the cards. (Source: “Dividend and Split History,” FS KKR Capital Corp, last accessed July 22, 2024.)
An article I read said that BDCs are great for dividends and the chance for “some” capital appreciation. But hopefully dividend hogs are equally interested in actually growing their investment, too, and are looking for more than just “some” growth.
On July 22, FS KKR stock hit a new record high of $20.48 per share. As of this writing, the stock is up 10% year to date and 19.2% on an annual basis. FS KKR stock is also up 26% since we last looked at it in May 2024.
Chart courtesy of StockCharts.com
The Lowdown on FS KKR Stock
FS KKR stock 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 company reported a solid start for 2024, generating $0.73 per share of adjusted net investment income and an annualized return on equity of 10%.
During the first quarter, FS KKR Capital’s investment activity increased, its liquidity position remained strong, and it made significant progress restructuring certain non-accruing investments.
Looking ahead, management said that it believes “the long-term earnings power of FSK continues to be healthy,” giving it the ability to “continue to reward shareholders with attractive distributions.”
