Updated May 27, 2021 by Bob Ciura
At first glance, PennantPark Floating Rate Capital (PFLT) is very attractive to high-income investors. That’s because PennantPark has an amazing 9% dividend yield.
PennantPark is one of over 100 stocks in our coverage universe with a dividend yield of 5% +. You can see the entire list of stocks that are yielding 5% + by clicking here.
In addition, PennantPark pays its dividend every month. This allows investors to assemble their assets even faster than a stock that pays a quarterly or semi-annual dividend.
There are currently fewer than 60 monthly dividend stocks. You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics like dividend yield and payout ratio) by clicking the link below:
But, as is often the case with sky-high dividend yields, PennantPark’s attractive dividend yield may be too good to be true.
This article explains the company’s business model and whether or not the payout is sustainable over the long term.
PennantPark is a Business Development Company or BDC. It primarily provides debt financing, usually secured first-line debt, senior debt, second-lien debt, mezzanine loan, or private high-yield debt. It specializes in debt security investments in medium-sized companies. To a lesser extent, preference and common stock investments are also made.
The company’s portfolio is highly diversified, with no particular industry making up more than 8% of the total mix and the vast majority making up less than 3% of the total mix.
Source: Investor Presentation
In addition, the company’s portfolio is fully floating rate, which opens its returns to the volatility of interest rates. This can be good during times of rising interest rates, but it is unfavorable when interest rates are falling.
An overview of the company’s investment philosophy shows that PennantPark favors midsize companies with annual EBITDA of $ 15 million to $ 50 million and has a high underwriting success rate.
Only 13 of the company’s 391 investments since its inception have reached the non-accrual stage. This track record of excellent underwriting is a key asset for PennantPark.
Source: Investor Presentation
Above is a selection of the types of investments the company makes in target companies. Not only do the targets themselves come from different industries and regions, but PennantPark also has a variety of tools with which to make its investments.
First Lien Secured Debt is the preferred vehicle due to its favorable repayment position, but the company will also conduct revolvers and capital injections. At the end of March, 86% of PennantPark’s portfolio was senior-secured debt.
PennantPark has a track record of successful investments. However, exposure to floating rate instruments has resulted in average returns falling over the past few years. The PennantPark portfolio’s return peaked at just over 9% at the end of 2018. However, lower interest rates on risk-free instruments have resulted in a decrease in the average return.
Because PennantPark’s portfolio consists entirely of floating rate instruments, most of which are linked to LIBOR, it benefits from rising interest rates. Low interest rates over the past decade have stifled the company’s investment income, but the potential for higher interest rates is a future catalyst.
Pennant Park reports ffirst-quarter Result on Can 5th2021. Adjusted net asset value per share was included at $12.60on 2.3% sequentially, during tTotal investment income for the quarter decreased to $19.4 Millions of $26.3 Millions a year– –before quarter. youThe income from debt securities was 7.6th%..
Meanwhile tThe company invested $ 160.2 million during the quarter in the four new and 17th Existing portfolio companies with a weighted average debt return Investments of 7.4th%. The company’s revenue and investment repayment totaled US $ over the same period172.1 Million.
The cash equivalents as of March 31, 2021 have been determined at $ 66.6 million versus $ 57.5 million USD on September 30, 2020. FQ1 Net investment income fell to $ 0.26th from $ 0.52 in the year– –before period.
We believe PennantPark has the track record and financial resources to continue growing for years to come. However, we are concerned about the ability to maintain the dividend.
PennantPark pays a monthly distribution of $ 0.095 per share. The stock has a very attractive annualized dividend yield of 9%. Even better, dividend payments are made monthly, so investors receive their dividends more often than quarterly.
However, it’s also important to assess whether the dividend is sustainable. Abnormally high dividend yields could be an indication that the dividend is in jeopardy.
PennantPark Floating Rate also has a heavily indebted balance sheet and payout ratio often near or exceeds 100% of the income. While Companies may well Keep this model going while the economy runs smoothly – –as the growing and stable Dividend over the past decade has shown – –it can collapse if the economy experiences a significant one and a prolonged downturn that would lead to credit underperformance.
Nevertheless, shareholders should certainly not expect an increase in the dividend in the short term, as the payout is now close to earnings. PennantPark’s ability to grow the portfolio and its average returns while keeping costs under control will determine whether the distribution is sustainable.
The company currently earns more in NII than it pays out in distributions. So we don’t expect a dividend cut, but add that PennantPark’s earnings will suffer if credit quality deteriorates or interest rates continue to fall, and a dividend cut may become a reality. We note that this has not yet happened, but the risks for PennantPark have increased as the portfolio is made up of floating rate instruments.
The old saying “high risk, high reward” seems to apply to PennantPark. On paper, it certainly has an attractive dividend yield, but the payout carries more risk than you’d think.
If everything goes according to plan, the stock could generate near double-digit total returns annually from returns alone. Higher interest rates would be a positive catalyst, but interest rates are likely to remain low for the foreseeable future.
There is an increased risk to the company. If PennantPark doesn’t increase its investment income, it could be forced to reduce its dividend at a later date.
Therefore, investors should exercise caution. Only investors with a higher risk tolerance should consider buying PennantPark despite the very high returns.
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