Updated May 21, 2021 by Bob Ciura
Business Development Companies – BDCs for short – can be an excellent source of income for high-income investors.
Main Street Capital Corporation (MAIN) is a good example of this. This BDC has a current dividend yield of 6%. Better still, Main Street Capital Corporation pays monthly dividends.
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:
The high dividend yield and monthly payments of the stock make them a solid choice for high income investors. But what about the strength of the underlying business?
Fortunately for investors, Main Street Capital’s business appears to be doing well. This article explains in detail Main Street Capital Corporation’s investment prospects.
Main Street Capital Corporation is a Business Development Company (BDC). You can find our full BDC list here.
The company acts as a debt and equity investor for lower mid-market companies (companies with annual sales of $ 10 million to $ 150 million) looking to transform their capital structures. The BDC can invest in both debt and equity, which gives it a significant advantage over companies that invest in private debt or private equity alone.
Main Street Capital Corporation also invests in the personal debt of medium-sized companies (not lower-middle-class companies) and has an emerging wealth management advisory business.
Source: Investor Presentation
The corporate structure of the BDC is quite simple. Main Street Capital Corporation operates three funds:
- The Main Street Mezzanine Fund
- The Main Street Capital II Fund
- The Main Street Capital III Fund
Because Main Street Capital Corporation operates its own mutual funds, management fees are kept to a minimum, giving it a cost-based competitive advantage over its competitors who outsource their fund management.
Main Street Capital Corporation’s holdings are highly diversified by both transaction type and geography. By transaction type, the BDC acquires most of its transactions through recapitalization and leveraged buyouts. Main Street Capital Corporation is also very diversified across industries.
Main Street Capital Corporation’s growth prospects stem from its unique strategy of increasing investment returns. Investors who own the stock will be rewarded as the BDC maintains its high monthly dividend and increases it over time.
At the corporate level, Main Street Capital Corporation’s growth is driven by its expertise in the lower mid-market segment of the economy.
May 6thth, Main Street Capital has released its first quarter results. Net investment income was $ 39.8 million a 9% increase compared to $ 36.5 million a year ago. The company achieved investment income per share of $ 0.58, up 2% of last year income of $ 0.57. The distributable investment income per share was $ 0.62, up 2% from $ 0.61 in the first quarter of 2020.
Main Street Net Asset Value per share increased Compared to the end of 2020 from USD 22.35 to USD 22.65. The enterprise declared monthly dividends of $ 0.205, This equates to an annual dividend of $ 2.46 per share. From the end of First quarter In 2021, the company had total liquidity of $ 818 million, comprised of $ 65 million in Cash and cash equivalents, $ 693 million in unused capacity under the revolving cRedit facility and $ 60 million remaining in the Small Business Investment Company debenture capacity.
To sum up, Main Street Capital Corporation has expertise in the lower middle class in its industry and has an emerging asset management business that enables strong operational leverage. These factors will drive BDC’s growth for the foreseeable future.
Competitive advantages and recession stability
As an investment manager, Main Street Capital Corporation’s primary competitive advantage comes from the talent it uses to source and fund deals.
The company’s senior management team has remained largely unchanged since its inception. The company’s CEO, Vince Foster, has been in office since its IPO in 2007 and previously worked for the predecessor of Main Street Capital Corporation.
A similar level of longevity can be seen in Main Street’s senior executive team. Main Street Capital Corporation also has a cost-based competitive advantage. As an internally managed private investor, Main Street has significantly lower operating costs than its externally managed counterparts, which helps improve net income.
As previously mentioned, Main Street Capital Corporation also has an enduring competitive advantage due to its unique expertise in the private debt and lower middle class stocks segment. This segment is generally too small for commercial banks to lend, but too large for small business representatives of retail banks to lend.
Financial firms and asset managers are often vulnerable to recessions as investors are likely to pull their money out to reduce losses when financial markets find themselves in dire straits. Even so, Main Street invests in private businesses and does not have the same level of liquidity as a mutual fund, for example. As such, Main Street Capital Corporation is expected to be moderately recession-resistant.
Although Main Street Capital Corporation went public just before the last recession, the company performed well during this difficult period of operations:
- 2007 net investment income per share – $ 0.76
- 2008 net investment income per share – $ 1.15 (51% more)
- Net investment income per share 2009 – $ 0.92 (20% decrease)
- 2010 net investment income per share – $ 1.16, up 26%
- 2011 net investment income per share – $ 1.69 (46% up)
- 2012 net investment income per share – $ 2.01 (up 19%)
The company’s financial results were also impressive from a distributable net income perspective:
- 2007 distributable net investment income – $ 1.10
- 2008 distributable net investment income – $ 1.44 (up 31%)
- Distributable net investment income 2009 – 1.50 USD (4% more)
- 2010 distributable net investment income – $ 1.50 (no change)
- Distributable net investment income 2011 – $ 1.56 (4% more)
- Distributable net investment income 2012 – USD 1.71 (10% more)
While net investment income per share declined from 2008 to 2009, Main Street Capital returned to growth the following year. All in all, Main Street Capital Corporation appears to be pretty recession-resistant.
Valuation and expected return
Conservatively, we expect net investment income to grow by 2% annually through 2026. For the past decade, Main Street Capital has traded at an average price-to-net investment income of 15 and is expected to have net investment income of $ 2.35 per share in 2021. The share has a PER of 17.5.
Our fair value estimate for Main Street stock is a P / E of 14.8. A falling valuation multiple could therefore lower the annual return by 3.3% over the next five years.
The high dividend yield is expected to make up the majority of Main Street’s total return, with a smaller contributing factor to the growth of NII per share.
Source: Investor Presentation
The expected total annual returns are as follows:
- 6% dividend yield (including additional dividends)
- 2% growth in net investment income
- -3.3% rating multiple reductions
We expect stocks in Main Street Capital to deliver 4.7% total annual return through 2026. This is a decent, albeit unspectacular, expected return for Main Street stocks.
While Main Street Capital Corporation is off the radar for most dividend growth investors, this BDC has a long history of generating significant shareholder returns.
The company’s many years of experience with superior investment management and know-how in the lower middle market segment gives it a strong competitive advantage in the private equity and debt industry.
In addition, Main Street Capital Corporation is shareholder friendly with a high yield and monthly payouts. The stock’s high yields and monthly dividend payments might be suitable for high-income investors, though the modest expected return currently holds the stock as a hold recommendation.
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