Main Street Declares 12th Consecutive Special Quarterly Dividend
There are a lot of reasons why investors should keep Main Street Capital Corp (NYSE:MAIN) on their radar.
Traditional financial institutions, like the big banks, and other lenders, like business development companies (BDCs), are seeing their share prices take off.
Why?
Back in November 2023, the Federal Reserve said that it was done raising interest rates and that rate cuts were on the table. Since then, inflation has come down and the Fed has begun lowering interest rates.
Solid economic data also suggest that the U.S. will avoid a recession and achieve a much more desirable soft landing.
A good interest-rate-cutting-cycle at the Fed and a strong economy should result in banks and other lenders issuing more debt and announcing new deals. This is especially true for BDCs, or what we call “Alternative Banks” here at Income Investors.
BDCs are the backbone of America’s small businesses. They provide capital to the so-called small and mid-sized companies that Wall Street’s big banks are too busy ignoring. Even though they might generate between $20.0 million and $100.0 million yearly in sales, that’s way too small for the big banks.
At least it is in the early days. The banks will step up to the plate once these companies start making more money.
Some well-known customers of BDCs have been Rug Doctor, Smashburger, Inc., Matterport Inc, Impossible Foods Inc., Lucid Group Inc, and Payless.
Because these companies have few places where they can go to borrow money, BDCs can charge above-average interest rates. For instance, a commercial bank might earn as little as three to five percent on its portfolio. By comparison, BDCs collect yields as high as 10%, 12%, or even 15%.
And, unlike traditional banks, thanks to a quirk in the tax law, BDCs pay out some of the highest yields around.
Traditional financial outfits have to pay the government between $0.25 and $0.35 in taxes on each dollar they make in profit. But BDCs pay little or no corporate tax on their earnings.
In exchange for this benefit, BDCs must legally distribute at least 90% of their ordinary taxable income to their shareholders. It’s not uncommon to see “Alternative Bank” stocks with payouts as high as 15%—five times higher than what you’d earn from traditional bank stocks.
About Main Street Capital Corp
Main Street Capital Corp is a BDC that targets lower middle market companies with annual revenue between $10.0 million and $150.0 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of between $3.0 million and $20.0 million. (Source: “Investor Presentation Second Quarter – 2024,” Main Street Capital Corp, last accessed October 15, 2024.)
The equity Main Street loans out comes with pretty favorable conditions for the BDC. Most of the loans have fixed variable rates, which means they rise as interest rates do.
Because their equity also has senior status, they get paid before anyone else does.
Because it works with profitable companies with senior status loans, Main Street Capital Corp has an exceptionally low default rate.
In addition to making money from loans, Main Street also takes an equity position in each company it lends to. With over $7.6 billion in capital under management, the BDC’s portfolio currently stands at 194 companies.
Main Street’s average loan size is $20.2 million. The largest total investment in an individual portfolio company represents 3.7%. Some of the industries The BDC invests in are internet software & services, machinery, health-care providers & services, tobacco, aerospace & defense, electrical equipment, hotels, and restaurants & leisure. (Source: “Fact Sheet As Of June 30, 2023,” Main Street Capital Corp, last accessed October 15, 2024.)
“Another Strong Quarter”
For the second quarter ended June 30, Main Street Capital announced that total investment income increased four percent to $132.2 million. (Source: “Main Street Announces Second Quarter 2024 Results,” Main Street Capital Corp, August 8, 2024.)
Net investment income was up two percent to $87.3 million, or $1.01 per share. The company’s distributable net investment income inched up two percent to $92.2 million, or $1.07 per share.
During the quarter, Main Street completed $154.4 million in lower middle market (LMM) portfolio investments, including $87.9 million in three new LMM portfolio companies. It also completed $323.8 million in total private loan portfolio investments.
Commenting on the results, Dwayne L. Hyzak, Main Street Capital Corp’s chief executive office, said, “We are pleased with our performance in the second quarter, which resulted in another quarter of strong operating results highlighted by a return on equity of 16.1%, distributable net investment income per share that continued to exceed the dividends paid to our shareholders and a new record for net asset value per share for the eighth consecutive quarter.”
Announces 12th Straight Supplemental Dividend
Main Street Capital’s unique investment strategy and conservative capitalization allows it to provide long-term growth in recurring monthly dividends and supplemental quarterly dividends.
Since its October 2007 initial public offering (IPO), Main Street has periodically increased the amount of its regular monthly dividends paid per share and has never reduced its regular monthly dividend amount per share.
In the second quarter, the company’s distributable net investment income exceeded the monthly dividends paid to shareholders by 49% and the total dividends paid to shareholders by 5%.
Main Street Capital Corp declared a regular monthly cash dividend of $0.245 per share in October, November, and December, respectively. This works out to $0.735 per share on a quarterly basis, or $4.09 on an annual basis, for a yield of eight percent.
And, thanks to strong second-quarter results and a favorable outlook for the third quarter, management declared a $0.30 per share supplemental dividend. This represents its 12th consecutive quarterly supplemental dividend. Main Street has also increased its regular monthly dividend eight times since the fourth quarter of 2021. (Source: “Main Street Announces Fourth Quarter 2024 Regular Monthly Dividends and Supplemental Dividend Payable in September 2024,” Main Street Capital Corp, August 6, 2024.)
Including all dividends declared to date, Main Street has paid $42.625 per share in cumulative cash dividends since its October 2007 IPO at $15.00 per share.
MAIN Stock at Record Levels
Typically, I wouldn’t look at a stock with an annual dividend of just eight percent. Here at Income Investors, we prefer companies with dividend yields above 10%. That said, I’m willing to make an exception when the underlying share price is crushing the broader market.
MAIN stock actually hit a new record intraday high of $51.60 on October 15. Currently trading hands at $51.24, the stock is up 40.8% year over year and 26.9% year to date. That’s the total return, including reinvested dividends.
Now, had you elected to cash in those monthly dividends, the annual return slips to 29.1%, while the 2024 gains fall to 18.5%.
I wouldn’t be surprised to see MAIN stock hit fresh highs over the coming weeks and months. It recently reported preliminary estimates for the third quarter, which includes net investment income of $0.99 to $1.01 per share and distributable net investment income of $1.05 to $1.07 per share.
Main Street’s preliminary estimate of net asset value (NAV) per share is $30.54 to $30.60, representing an increase of $0.74 to $0.80 per share, or 2.5% to 2.7%, from the NAV per share of $29.80 as of June 30, 2024.
Chart courtesy of StockCharts.com
The Lowdown on Main Street Capital Corp
Main Street Capital Corp continues to be a great BDC with a strong balance sheet and growing portfolio. The latter helps the BDC generate a lot of money and provides investors with a stable, monthly dividend.
Income investors would be happy to hear that Main Street has never decreased its monthly dividend, it has declared 12 consecutive supplemental quarterly dividends, and its stock price is at record levels.
Based on the continued strength in the third quarter, management expects to report another meaningful supplemental dividend to be paid in the fourth quarter of 2024. This would represent Main Street Capital’s 13th consecutive quarterly supplemental dividend, to go along with eight increases to its regular monthly dividends since the fourth quarter of 2021.