Main Street Capital: Best-Of-Breed BDC Hikes Its Monthly Dividend Yet Again

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About: Main Street Capital (MAIN)
by: Achilles Research
Summary

Main Street Capital Corp. reported solid first quarter results last week.

On the back of strong Q1-2019 net investment income, MAIN announced another increase in its monthly distribution.

The BDC also declared a special $0.25/share supplemental dividend for June last month.

Shares continue to sell for a high premium to NAV.

The forward dividend yield for MAIN is 6.1 percent (not including special dividends).

Main Street Capital Corp. (MAIN) released a convincing deck of financials for its first fiscal quarter last week. The business development company once again outearned its dividend with net investment income and Main Street Capital Corp. raised its monthly dividend payout again. Shares are the most expensive in the BDC sector, thanks to Main Street Capital Corp.'s flawless performance history, and an investment in MAIN yields 6.1 percent.

Main Street Capital Corp. - First Quarter Earnings Overview

Main Street Capital Corp. reported very solid first quarter earnings last week that point to stable conditions in the BDC sector and to continued upside potential for Main Street Capital Corp.'s shares.

In the first quarter of 2019, Main Street Capital Corp.'s total investment income grew 10 percent year over year to $61.4 million and its distributable net investment income hit $41.8 million, reflecting a 6 percent year over year growth on the back of a strongly performing investment portfolio.

Here's an earnings snapshot for Main Street Capital Corp. for Q1-2019.

Source: Main Street Capital Corp. Investor Presentation

Importantly, based on run-rate distributable net investment income, Main Street Capital Corp. could see new earnings records in 2019, under the condition that the middle market lending sector continues to remain in good shape and that demand for new investment capital remains high throughout the year.

Source: Main Street Capital Corp.

Main Street Capital Corp.'s strong Q1-2019 results are not an outlier, though. The business development company's distributable net investment income, dividends and net asset value have gone up consistently over the last decade, making MAIN a preferred income vehicle to invest in during periods of rising uncertainty and market volatility.

Source: Main Street Capital Corp.

Main Street Capital Corp. is an internally-managed BDC which translates into an efficient operating cost structure. Main Street Capital Corp. is much more efficient in terms of operating expenses than the average BDC in the sector. Internally-managed BDCs are paid based on performance whereas externally-managed BDCs are often compensated based on the amount of assets under management. Hence, the interests between managers and shareholders are more effectively aligned under an internal management structure.

Source: Main Street Capital Corp.

Limited Net Interest Income Upside

Main Street Capital Corp. has two ways of growing its net investment income:

1. It can raise capital or use money from repayments to make new debt and equity investments; or

2. the Fed raises interest rates which increases the earnings power of Main Street Capital Corp.'s large floating-rate investment portfolio. Since the Fed will most likely not raise short-term interest rates in 2019, the appeal of point #2 as a means to produce NII growth has decreased since the announcement of the Fed's new rate policy in March.

Nonetheless, here is a sensitivity table showing Main Street Capital Corp.'s theoretical NII upside in a rising rate environment.

Source: Main Street Capital Corp.

Distribution Coverage

Main Street Capital Corp.'s outearned its dividend with (distributable) net investment income in every single quarter in the last two years. Main Street Capital Corp. earned an average of $0.63/share in net investment income and $0.67/share in distributable net investment income in the last eight quarters which compares to an average dividend payout of $0.57/share.

Main Street Capital Corp.'s dividend has a high degree of dividend safety.

Source: Achilles Research

In light of the BDC's strong portfolio performance in the last quarter, Main Street Capital Corp.'s management raised its monthly dividend payout from $0.20/share to $0.205/share for the months of July, August and September, reflecting an increase of 2.5 percent.

Further, Main Street Capital Corp. declared a supplemental dividend of $0.25/share that will be paid out of the company's undistributed taxable income. The supplemental dividend will be paid on 6/25/2019 to stockholders of record as of 6/18/2019.

Valuation

Main Street Capital Corp. is by far the most expensive business development company in the BDC sector, thanks to the company's excellent net investment income, dividend and net asset value growth record. Main Street Capital Corp.'s P/NAV-multiple currently is ~1.7x.

Chart Data by YCharts

Risk Factors Investors Need To Consider

Main Street Capital Corp. has little dividend risks over the short haul, but the BDC's valuation surely is elevated, even when compared against a group of higher-quality business development companies (see chart above).

The biggest risk factor, therefore, relates to the stock market itself. In case stocks continue to sell-off on the back of an escalating trade war between the United States and China, Main Street Capital Corp. can be expected to slide down with the broader stock market. That said, though, MAIN clearly is a higher-quality income vehicle that's worth doubling down on when stocks correct again.

Your Takeaway

Main Street Capital Corp. remained a best-in-class BDC in the first quarter. The business development company reported growing (distributable) net investment income and continued to outearn its dividend with NII. Main Street Capital Corp. further handed investors another dividend raise, which underpins the BDC's value proposition for income investors looking for a growing yield on cost. Shares are very high premium, but the performance history so far justifies an above-average NAV-multiple. Buy for income and capital appreciation.

Disclosure: I am/we are long MAIN, GSBD, ARCC, TSLX, HTGC. 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.