Updated May 26, 2021 by Bob Ciura
Business Development Companies (BDCs) are an attractive investment vehicle for those who focus on generating income. They tend to distribute most of their profits to shareholders and therefore tend to generate very high returns.
Gladstone Capital Corporation (GLAD) is a BDC with a current dividend yield of over 7%. It’s one of more than 100 stocks with a dividend yield of 5% +. The full list of established stocks that are yielding 5% + can be found here.
And including Gladstone Capital, there are fewer than 60 stocks paying dividends each month, compared to the more traditional quarterly or semi-annual payment plans.
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:
Gladstone Capital’s dividend yield tops the rest of the market. The S&P 500 Index has an average dividend yield of just 1.4%, which is one-fifth the return of Gladstone Capital.
However, a high return is not enough when the underlying business is weak or the dividend is in danger of being cut. This article explains whether Gladstone Capital is a good investment option for high income investors.
Gladstone Capital operates as a business development company and invests in debt and equity securities, with income derived primarily from its debt securities. These investments are made across a variety of stocks (10% of the portfolio) and debt (90% of the Po)Portfolio) in general with very high yields. The loan size is usually around $ 7 million to $ 30 million Range and has Term of up to seven years.
Gladstone Capital selects targets in stable industries with sustainable margins and cash flows and favorable growth characteristics. The company focuses on non-cyclical and non-financial businesses to avoid peaks and troughs in the earnings of its target companies. These are companies with leadership roles in their respective industries, growth potential and annual EBITDA between $ 3 million and $ 15 million.
In order for Gladstone Capital to continue to distribute its high dividends to shareholders, which is its primary stated objective, it is critical that its investment portfolio continues to generate interest and dividend income and capital gains in excess of its operating and financial costs.
It has a diversified portfolio, both in terms of deal sourcing and in terms of industry groups.
Source: Investor Presentation
Loans to these companies typically range from $ 7 million to $ 30 million, with a term of a few years. Holdings include preferred or common stocks. Gladstone Capital strives to maintain a debt / equity split of 90-10%.
At the end of 2020, Gladstone Capital’s portfolio was a fair value of $ 452 million with diversification in 47 companies and 18 different industries. The asset mix is rather conservative at 91.5% of investments in secred loans with a lower risk share of 48.6% first pawn loan.
Thanks to the company’s investment strategy, the company has significant growth opportunities to look forward to.
One of the most compelling growth catalysts for Gladstone Capital is rising interest rates. The company will benefit from higher interest rates because the bulk of its debt portfolio consists of floating rate securities.
Gladstone reported to seconFirst quarter results on May 4thth, 2021, and the company fell short of expectations on both peaks and the bottom line. The company invested $ 72 million in three new portfolio companies and after $ 48 million in Repayments, net new originations of $ 24 million for postedr the quarter.
The secured first lien increased to 58% of the total amount The portfolio and Gladstone maintained a weighted average debt return of 10.6%. Gladstone’s debt and stock portfolios achieved a market appreciation of $ 16 million in the second quarter. That helped drive a 9Increase in net asset value by 0.6% from the end of the December quarter, and it ended the second quarter at $ 271 million.
On a per– –On a share basis, NAV increased 6.6% to $ 8.11. Net investment income increased 1.9% from the previous quarter to $ 6.4 million. Lower spending helped improve marguments for Gladstone results in a net increase in assets of 65 cents per share.
In retrospect, Gladstone struggled to generate growth. Gladstone’s share issue was funded higher NII in dollars Terms but I didn’t make enough over the cost of capital to move the needle to NII– –Per– –Share. Given this story, we affirm ours estimate of Gladstone is long– –Maturity growth rating at the 0%.
The returns on the company’s portfolio affect its profitabilitycome and therefore cover and pay for his expenses Distributions to the shareholders. Over time the company has Portfolio The return has risen higher almost 11%, Where it is today. However, higher expenses have offset recent growth part of the reasonson why NII– –Per– –share stays flat over time.
We notice that spending was lower in the second quarter, but this is an outlier. Gladstone’s portfolio continues to grow in US dollars, but given the offsetting increase in spending and undrawn credit– –Provisions, NII has not grown.
Gladstone Capital pays a monthly dividend, which enables shareholders to receive 12 dividend payments per year, more frequently than four quarterly distributions. It currently pays a monthly dividend of $ 0.065 per share after the dividend was cut ~ 7% last year from its previous level of $ 0.07 per share.
We believe it is unlikely that Gladstone Capital will increase its payout anytime soon. On an annual basis, Gladstone Capital’s dividend equates to a high return of 7.1%.
Therefore, Gladstone Capital can look back on a solid track record of steady payouts even during the great recession of 2008-2009. The company is able to maintain its high returns thanks to its tax rating and favorable fundamentals. BDCs must distribute at least 90% of taxable income. This eliminates corporate income tax so that capital gains can be passed on to shareholders in a similar way to a REIT.
With a projected dividend payout ratio of 94% for 2021, Gladstone Capital’s dividend payout is safe, but without much cushioning. BDCs will always have high payout rates due to the tax rule of distributing almost all of their income, but it’s easy to see why Gladstone Capital hasn’t increased its payout in such a long time.
This is a tight payout ratio, which means the company may not be able to sustain a major economic downturn and maintain its dividend. Should another major financial crisis occur, Gladstone Capital’s dividend could be jeopardized.
Assuming continued economic growth, the dividend appears sustainable. However, the high payout ratio carries a relatively high risk to the sustainability of the dividend, especially during a recession.
Investors should approach high dividend yields with caution. High yields are commonplace in the BDC asset class, but many have slashed their dividends in recent years. For its part, Gladstone Capital cut its dividend slightly last year, but we don’t think another dividend cut is imminent.
However, investors must pay close attention to the company’s future earnings reports. It has a very tight payout ratio and a significant deterioration in the performance of its investment portfolio could jeopardize the dividend.
Overall, Gladstone Capital is likely only attractive to high-income investors looking for high returns.
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