PennantPark Stock: 12%-Yielder Hikes Monthly Payout 14%
July 19, 2024
PNNT Stock at Record Levels
Now is a fantastic time to take a look at PennantPark stock.
Let me explain…
At the start of the year, analysts thought the Federal Reserve could announce as many as six interest-rate cuts in 2024.
So far, it hasn’t announced any. But chances are good that a rate cut will be coming in September.
According to U.S. Federal Reserve Chair Jerome Powell, the U.S. is “no longer an overheated economy,” with a job market that has cooled and is mostly back to where it was before the 2020 health crisis. (Source: “US economy no longer overheated, Fed’s Powell tells Congress,” Reuters, July 9, 2024.)
Analysts at Citi have predicted that the Fed could cut interest rates by 200 basis points (two percent) over its next eight meetings, through to the summer of 2025. That would take interest rates down from a range of 5.25% to 5.5% to a range of 3.25% to 3.5%. (Source: “Citi: Fed Could Cut Interest Rates By 200 Points Through 2025,” OilPrice, July 8, 2024.)
Even if that does happen, rates will still be well above the pre-pandemic levels of 1.5%. And interest rates are expected to remain above those pre-2020 health crisis levels for years to come.
And those decade-high interest rates will continue to be great for business development companies (BDCs) like PennantPark Investment Corp. (NYSE:PNNT).
PennantPark Investment is a private equity fund that focuses on companies owned by middle-market private equity sponsors with a track record of supporting their portfolio companies. (Source: “Investor Presentation, March 31, 2024,” PennantPark Investment Corp., last accessed July 10, 2024.)
Why middle-market companies?
The U.S. middle market includes nearly 200,000 companies, generates $10.0 trillion in annual revenue (1/3 of the U.S. economy), and is the world’s fifth-largest economy on a standalone basis.
PennantPark’s core focus is U.S.-based companies, where it invests between $10.0 million and $100.0 million across the capital structure (senior secured loans, subordinated debt, and other investments) in companies with earnings of $10.0 million to $50.0 million.
The BDC’s debt portfolio consists of 97% floating-rate investments and 3% fixed-rate investments.
PennantPark’s current portfolio includes 138 different companies with an average investment size of $8.5 million.
Some of the industries targeted by the company include business services, health care, consumer products, financial services, telecommunications, aerospace and defense, hotels, and insurance.
Solid Second-Quarter Net Investment Income
For the second quarter of fiscal 2024 ended March 31, 2024, PennantPark reported revenue (investment income) of $36.0 million, down slightly from $36.3 million in the same period last year. (Source: “PennantPark Investment Corporation Announces 14.3% Increase of Its Monthly Distribution to $0.08 per share and Financial Results for the Quarter Ended March 31, 2024,” PennantPark Investment Corp., May 8, 2024.)
The BDC’s fiscal second-quarter net investment income was $14.3 million, or $0.22 per share, down from $16.6 million, or $0.26 per share, in the second quarter of fiscal 2023.
During the second quarter of fiscal 2024 PennantPark invested $188.5 million in six new and 43 existing portfolio companies at a weighted average yield on debt investments of 11.7%. Sales and repayments of investments totaled $71.0 million.
For comparison’s sake, during the second quarter of fiscal 2023, the company invested $58.3 million in six new and 34 existing portfolios with sales and repayments of investments totaling $114.2 million.
Increases Monthly Distribution 14% to $0.08/Share
Thanks to its robust earnings stream, PennantPark is able to provide investors with a reliable monthly distribution. Based on the chart below, it might look like the company cut its payout (red line) in late 2023, but it didn’t. That’s when it switched from a quarterly dividend to a monthly dividend.
Back in June, the company increased its monthly dividend payout by 14.3% to $0.08 per share. PennantPark has maintained that payout since then. Most recently, in July, it declared a monthly distribution of $0.08 per share, or $0.96 per share on an annual basis, for a forward yield of 12.32%. (Source: “PennantPark Investment Corporation Announces Monthly Distribution of $0.08 per Share,” PennantPark Investment Corp., July 2, 2024.)
PennantPark Stock Hits Record High
It’s great when you can find a ultra-high-yield dividend stock that’s also bullish. More often than not, a high yield is accompanied by a lower share price. That’s not the case with PennantPark though.
On July 9, PNNT stock hit a new record intraday high of $7.95 per share. It continues to trade near that level. As of this writing, PennantPark stock is thumping the broader market, up:
- 17% over the last six months
- 21% year to date
- 47% year over year
Chart courtesy of StockCharts.com
The Lowdown on PennantPark Stock
PennantPark Investment Corp. is a great BDC with a strong underwriting process that helps it invest in strong middle-market companies. With 97% of its debt portfolio floating rate, the company is able to generate lots of cash, especially in this high-interest-rate environment.
And thanks to a BDC loophole, PennantPark stock needs to pass along 90% of its taxable income to investors in the form of a high-yield distribution.
Going forward, the company’s earnings stream is expected to remain robust, which should help PennantPark stock continue to reward buy-and-hold investors with a monthly distribution.
