Summary
This article discusses a BDC that’s currently yielding 6.6% but will likely be increasing its dividend for the reasons discussed in this article.
The company will be announcing dividends in two weeks but will likely not include an increase mostly due to management being conservative for the reasons discussed below.
However, there’s a good chance that an increase will be announced in March 2022.
Also, I’m expecting large amounts of realized gains that could drive special dividends in 2022.
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Galeanu Mihai/iStock via Getty Images The following information was previously provided to subscribers of Sustainable Dividends along with target prices, risk ranking, and financial projections to test the sustainability of the current dividends. Quick Introduction to Business Development Companies (“BDCs”)
Similar to Real Estate Investment Trusts (“REITs”), Business Development Companies are regulated investment companies (“RICs”) required to pay at least 90% of their annual taxable income to shareholders, avoiding corporate income taxes before distributing to shareholders. This structure prioritizes income to shareholders (over capital appreciation), driving higher annual dividend yields that mostly range from around 6% to 11%.
This article discusses PennantPark Investment ( PNNT ) which I purchased in November 2020 at $4.06 (currently $7.02) per share as discussed in the previous article:
It should be noted that the article was published Nov. 29, 2020, giving readers plenty of reasons to buy PNNT. Did you?
As discussed in ” BDCs Vs. REITs: Comparing Returns For Higher-Yield Investors ,” BDCs have been easily outperforming REITs over the last two years which will likely continue especially in an inflationary and/or higher interest rate environment. Most BDCs seem to be in a virtuous circle of improving asset quality supporting a lower cost of capital driving improved earning, NAV, and dividend increases. Many have recently issued very low rate unsecured notes and refinanced their balance sheets (including PNNT discussed below) taking some short-term hits but locking in some strong quarters coming up. PNNT Dividend Update
Author’s Note: The following information was provided to subscribers along with three quarters of financial projections using base, best, and worst-case assumptions to test the sustainability of the current dividends.
PNNT’s dividend coverage continues to improve partially due to its previous and upcoming increases in its net asset value (“NAV”) per share combined with its 7% hurdle, growing the portfolio with increased leverage, selling and reinvesting of many of its equity positions and its PennantPark Senior Loan Fund (“PSLF”) joint-venture with Pantheon Ventures . With regard to net investment income, we have a three-pronged strategy which includes, one, growing assets on balance sheet of PNNT, as we move towards our target leverage ratio of 1.25 times debt to equity from 0.90 times . Number two, growing our PSLF JV with Pantheon to about $550 million of assets from approximately $405 million of assets through balance sheet optimization, including a potential securitization, and three, the opportunity to rotate out of our equity investments over time and into cash pay yield instruments. We are well on our way to implementing the NII growth strategy. ” Subsequent to quarter-end, PNNT had new funded investments of $97.8 million, net of sales and repayments . The September quarter was a busy period for us at PNNT, as we originated $165 million of new loans far outpacing the repayment activity. As a result, the investment portfolio of PNNT increased by approximately $110 million to $1.26 billion from $1.1 5 billion. We continue to be active since September 30th, PNNT has had new funded investments, net of repayments and sales of $98 million . The outlook for new loans is attractive. We are as busy as we have ever been in 14 years in business. PSLF’s investment portfolio also grew this quarter to $405 million from $386 million, an increase of $19 million.” Source: PNNT Earnings Call
Also, similar to most BDCs, the company is refinancing higher rate borrowings with flexible unsecured notes. On October 21, 2021, the company issued $165 million of 2026-2 Notes at a public offering price per note of 99.436% partially used to redeem $86 million of 5.50% notes due 2024 on November 13, 2021. Subsequent to September 30th, PNNT issued $165 million of unsecured notes maturing in 2026 with an interest rate of 4%. We used $86.3 million of the proceeds to fully redeem the 2024 notes which pay an interest of 5.5%. This will reduce our […]
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