Saratoga Investment Corp: 12.2%-Yielding Alternative Bank Pays Special Dividend
January 8, 2025
SAR Stock’s Dividend Payout at Historic High
Business development companies (BDCs) like Saratoga Investment Corp (NYSE:SAR) are designed to support the backbone of the American economy and income-starved investors.
BDCs, or what we like to call “Alternative Banks” here at Income Investors, provide small- and mid-sized companies with financing. It’s an important segment of the economy, responsible for 99.9% of all businesses in the U.S.
Alternative Banks provide so-called smaller businesses with the kind of financing that traditional banks won’t touch. Now, the kinds of businesses Saratoga Investment supports aren’t exactly small. The BDC focuses on the lower end of the middle market, targeting U.S.-based, cash-flow-positive companies with annual revenues between $10.0 million and $150.0 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) in excess of $2.0 million.
With over $1.0 billion in assets under management, Saratoga offers a broad range of financing solutions, including subordinated debt, first- and second-lien loans, one-stop and unitranche structures, and equity co-investments.
Income investors love that Alternative Banks like Saratoga have to legally distribute at least 90% of their taxable income to shareholders as dividends. And Saratoga is great at making money and rewarding investors.
The BDC increased its annual dividend in the last four consecutive years, recently announced a special dividend, and has a current forward dividend yield of 12.28%. SAR stock is up four percent in 2024, with Wall Street analysts forecasting potential upside of nine percent over the following quarters.
About Saratoga Investment Corp
Even though interest rates are coming down, they are still expected to remain higher than where they were before the 2020 health crisis.
And high (though not perpetually high) interest rates are great for Alternative Banks, especially those with a lot of floating-rate loans. On average, 80% of loans in a typical BDC profile are floating rate.
Saratoga does a little bit better than the average BDC: 99% of the loans in its portfolio have floating interest rates. (Source: “Q2 FY2025 Shareholder Presentation,” Saratoga Investment Corp, October 9, 2024.)
Saratoga Investment Corp is a BDC that specializes in providing loans to middle-market companies. It typically makes $60.0-million to $75.0-million investments in leverages and management buyouts, recapitalizations, debt refinancing, growth financing, acquisition financing, and transitional financing. (Source: “Investment Profile,” Saratoga Investment Corp, last accessed December 12, 2024.)
The BDC typical invests in companies with:
- Revenue of $10.0 million to $150.0 million and EBITDA of $2.0 million or more
- Strong margins and free cash flow
- Recurring revenues and a stable historical performance
- Modest capital expenditure and working capital requirements
- A leading market position or niche with competitive advantages
- Growth prospects in healthy end markets
Saratoga has made investments across 41 distinct industries, including aerospace, health care, consumer services, financial services, logistics and distribution, software and technology services, specialty chemical, and media and telecommunications.
Strong Fiscal Q2 Results
For the second quarter of fiscal 2025, ended August 31, 2024, Saratoga reported total investment income, or portfolio income, of $43.0 million. This was a 21.1% increase from $35.5 million in the same period last year and up 11.2% from the $38.7 million in the preceding quarter. The company’s investment income reflects a weighted average interest rate of 12.6%, consistent with last quarter and last year. (Source: “Saratoga Investment Corp. Announces Fiscal Second Quarter 2025 Financial Results,” Saratoga Investment Corp, October 8, 2024.)
Saratoga’s adjusted net investment income (NII) increased 38.3% on an annual basis and 26.9% on a sequential basis to $18.2 million. Adjusted NII per share grew 23% on an annual basis and 26.6% on a sequential basis to $1.33 per share.
Net asset value (NAV), which is the value of Saratoga’s assets minus liabilities, was $372.1 million in the fiscal second quarter. This was up 2.7% from $362.1 million in the same period last year and up 1.1% from $367.9 million in the first quarter of fiscal 2025.
The BDC’s NAV per share was $27.07 as of August 31, 2024, compared to $28.44 as of August 31, 2023, and $26.85 as of May 31, 2024.
Commenting on the fiscal second quarter financial results, Christian L. Oberbeck, Saratoga’s chairman and chief executive officer, said, “Though interest rates have decreased from their highs, they remained stable throughout our fiscal second quarter, resulting in solid recurring net interest margins on our portfolio.”
Quarterly Dividend Payout at Record Levels
Thanks to Saratoga’s strong earnings and stable credit performance, it is able to return substantial capital to shareholders in the form of a growing dividend.
This past November, the BDC declared a base quarterly dividend of $0.74 per share and an additional special dividend of $0.35 per share. (Source: “Saratoga Investment Corp. Announces Quarterly Dividend of $0.74 Per Share for the Fiscal Third Quarter Ending November 30, 2024,” Saratoga Investment Corp, November 7, 2024.)
This works out to an annual distribution of $2.95 per share, for a forward dividend yield of 12.28%. Of note, Saratoga has raised its annual dividend for the last four years.
Commenting on the dividend and special dividend, Oberbeck noted, “As a result of the strong overall performance of our portfolio during the fiscal second and third quarters, the board of directors approved a dividend of $0.74 per share, equivalent to the highest in our history, while maintaining industry leading dividend coverage and yield.”
Oberbeck added, “Additionally, we are pleased to declare an additional special distribution of $0.35 per share, which was driven by the substantial overearning of our dividend during the previous fiscal year.”
SAR Stock Hits Record High
When we last looked at Saratoga back in September 2024, SAR stock was trading just 2.7% below its June 2023 record high of $25.07 per share. By all accounts, it looked like the stock would make a run at that level and hit a fresh high.
It did.
On November 11, SAR hit a record intraday high of $26.12 per share. It has since retreated from that level on short-term profit-taking, but it still has potential.
Wall Street is confident that SAR will continue to trade near these levels, and perhaps even hit another record high over the coming year. Conservative analysts provided a 12-month price target range of $25.00 to $29.00 per share; this points to potential gains of 3.5% to 20.1%.
Chart courtesy of StockCharts.com
The Lowdown on Saratoga Investment Corp
Saratoga Investment Corp continues to be a great BDC with a growing, diversified portfolio. It has an attractive risk portfolio: 99.7% of loan investments have the highest internal rating, 85% of investments are first-lien, and 99% of the loans in its portfolio have floating interest rates.
The BDC’s overall solid performance is reflected in its continued strong key results in this past quarter, including its sequential adjusted NII per share growth of 26.7% over the past quarter to $1.33 per share, sequential NAV per share increase of $0.22 per share to $27.07 per share, and dividend of $0.74 per share, which was up 4.2% from $0.71 per share in the second quarter of 2023.
