Fifth Street Finance Corp. (FSC) is a business development company which is focused on making loans and investments in small to mid-sized firms. It invests in a wide range of sectors which includes healthcare, manufacturing, energy, defense, technology, marketing and others. It uses the interest payments it receives and the capital gains it earns by investing in these companies to pay shareholders a very generous yield.
Some of the companies in its investment portfolio include: Dominion Diagnostics (healthcare services), Genoa Healthcare (pharmaceuticals), Deltek (IT consulting), Titan Fitness (leisure facilities), Phoenix Brands (household products), and ReBath (home improvement), just to name a few.
Analysts at JPMorgan (NYSE:JPM) recently upgraded the rating on this stock to overweight and said the dividend was secure. A recent article details the positive view on Fifth Street Finance, and it states:
"We are initiating coverage of Fifth Street Finance Corp. with an Overweight rating and an $11 price target. FSC is one of five BDCs to have crossed the $1.5B asset threshold. We believe that as BDCs migrate from $1B to $2B in receivables, they begin to generate additional competitive advantages including: more consistent access to equity, lower borrowing costs, increased operating leverage, and greater transaction flexibility. In our view, FSC is at this inflection point, potentially creating a significant opportunity over the next 12 to 24 months. Through year-end, we expect the company to optimize leverage and that NII will fully cover the quarterly dividend. We view FSCs increasingly secure 10.6% dividend yield as attractive."
The analysts' price target of $11 does not appear to be exciting when the stock is nearly trading at that level now. However, capital gains are not the point in this investment. It is the dividend that matters here and the analysts' view that it is sustainable and nearly 11%, is what should excite investors. Another big positive is that it pays the dividend on a monthly basis, which means you won't have long to wait before the next payout.
Since this company invests in other firms, a general economic downturn would create downside risks for shareholders. Another factor to consider is that business development companies can announce secondary offerings to raise capital and that could create a pullback in the stock. Since it is trading near 52-week highs, these shares might be worth watching and waiting on, for a pullback that may come when the markets are down sharply.
Here are some key points for FSC:
Current share price: $10.95
The 52 week range is $8.99 to $11.08
Earnings estimates for 2013: $1.14 per share
Earnings estimates for 2014: $1.17 per share
Monthly dividend: 9.6 cents per share, which yields about 11%
Data is sourced from Yahoo Finance. No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.