One-Year-Old BDC Showing Promise
You can’t ignore business development companies (BDCs) if you are seeking relatively stable dividend income and the opportunity for moderate capital appreciation.
That’s because the objective of a BDC is to distribute at least 90% of its taxable income and tax-exempt interest annually to shareholders. The more a BDC earns, the higher the dividends go.
And with the interest-rate-and-business environment expected to potentially become friendlier under President-elect Donald Trump for the next four years, BDC structures could attract bullish tailwinds.
On the smaller end, Palmer Square Capital BDC Inc (NASDAQ:PSBD) is a $504.5-million-market-cap BDC that could benefit from this situation.
Palmer Square aims to maximize the total return of income received and capital appreciation. This is carried out through investments in the corporate debt securities of small to large private companies in the U.S. (Source: “Form-10K,” Palmer Square Capital BDC Inc, last accessed December 31, 2024.)
Palmer Square Capital BDC has a diversified client list with investments in 39 industries.
At the end of 2023, the five top industries served by the BDC were:
- Software: 13.9%
- Health-care providers and services: 9.2%
- Professional services: 7.1%
- IT services: 6.6%
- Insurance: 5.8%
As of September 30, 2024, Palmer Square Capital had relationships with 212 portfolio companies, combining for a total fair value of $1.39 billion and portfolio yield of 10.48%, versus 9.82% a year earlier. (Source: “Form-10Q,” Palmer Square Capital BDC Inc, last accessed December 31, 2024.)
The company began in 2019, debuting with its initial public offering (IPO) at $16.45 in January 2024.
At the time of writing on December 31, Palmer Square Capital stock was trading at $15.41, which was below the IPO price and just above the low of $15.27. The high was $17.12 in February 2024.
Palmer Square Capital stock is currently hovering just below both its 50-day moving average (MA) of $15.93 and 200-day MA of $16.25. A recovery of the 50-day MA could drive PSBD stock toward the 200-day MA and its high.
Chart courtesy of StockCharts.com
Strong Growth Supports Steady Dividends
Palmer Square reports revenues as total investment income and earnings as net investment income.
Results on both the top and bottom lines have been strong, helping to support a sustainable dividend policy.
The total investment income came in at $112.2 million in 2023, up 50.6% compared to $74.5 million in 2022 and a stellar 182.6% from $39.7 million in 2021. (Source: Palmer Square Capital BDC Inc, op. cit.)
Total investment income in 2023 was comprised of $107.7 million in interest from investments and $4.1 million in dividend income.
Palmer Square increased its fair value of investments from $600.1 million in 2020 to $1.0 billion in 2023.
In the third quarter of 2024, the BDC’s total investment income was $37.3 million versus $28.7 million for the third quarter in 2023. For the nine months to September 30, its total investment income of $108.6 million was 31.8% above the comparative $82.4 million in 2023. (Source: Palmer Square Capital BDC Inc, op. cit.)
Based on the results to date in 2024, Palmer appears to be on its way to surpassing the consensus Wall Street estimates.
Analysts expect Palmer Square to grow total investment income by 27.9% to $143.5 million in 2024, followed by a 5.8% drop to $135.2 million in 2025. There’s a high estimate of $141.5 million and low estimate of $129.5 million, so there’s some uncertainty, which is not unusual with a BDC. (Source: “Palmer Square Capital BDC Inc. (PSBD),” Yahoo! Finance, last accessed December 31, 2024.)
The company’s bottom line shows consistent net investment income with $2.26 per share in 2023, which was significantly higher compared to $1.78 per share in 2022 and $1.47 per share in 2021.
Palmer’s third-quarter net investment income was $0.48 per share versus $0.57 per share in the third quarter of 2023. This was in line with the consensus estimate.
The BDC’s net investment income of $1.48 per share for the nine months to September 30 was below the comparative $1.68 per share. This points to a drop-off in 2024, with analysts estimating $1.95 per share followed by $1.83 per share in 2025. (Source: Yahoo! Finance, op. cit.)
As far as its balance sheet goes, Palmer Square had a debt-to-equity ratio of 149%, which is not out of line for a BDC. (Source: Yahoo! Finance, op. cit.)
Strong Dividends in IPO Year
Palmer Square Capital stock distributes two dividends each quarter with a regular base dividend and smaller supplemental dividend.
A regular base dividend of $0.42 per share was announced for the fourth quarter, payable on January 13, 2025, with a record date of December 27. Palmer Square also added a supplemental dividend of $0.06 per share for a combined $0.48 per share.
Palmer Square Capital stock’s dividend yield is 12.39% based on the total dividend of $1.91 per share for the four quarters. This equates to a payout ratio of around 104% based on the consensus 2025 earnings, which isn’t unusual for a BDC.
I expect the dividend will hold around this amount or slightly lower in 2025.
The Lowdown on Palmer Square Capital Stock
While Palmer Square Capital stock is relatively new as a publicly traded BDC, the results have been impressive so far.
A friendlier business climate under Trump 2.0 and the expected decline in interest rates could benefit Palmer Square Capital stock as far as dividends and capital appreciation potential.