Main Street Capital: Took A Licking And Kept On Paying
Summary
- COVID hit all BDCs (Business Development Company) hard.
- MAIN continued to pay its monthly dividend, and is again generating all the cash needed to pay it.
- While the share price is well above the lows of last year, its current price is still a good value.
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Introduction
Source: MAIN Website
My last article on Main Street Capital (NYSE:MAIN) was from well before the COVID pandemic when MAIN had started to phase out the twice a year supplemental dividend payment it had been making for some years. Basically, management had decided that the funding for those supplemental dividends had become so certain that they could be folded into the regular monthly dividend payment. So I discussed how that impacted my view and valuation for MAIN here.
This slide, from the latest earnings presentation, lists some of the reasons why I like MAIN.
Source: Q4 Earnings Presentation
The first item, circled in green, is what first attracted me to MAIN. Unlike a lot of BDCs, MAIN has had a fairly consistent record of increasing its NAV (Net Asset Value). Since BDCs provide debt financing for small companies, their investments are constantly decreasing in value. Even if their borrowers don't pay down principle, the loans have a limited term, and as time passes there are fewer interest payments remaining. So to keep NAV flat, the company needs to find new investments. Growing NAV is even harder.
On top of a growing NAV, MAIN had been growing its dividend payments each year. This too is somewhat rare in the BDC world where many pay the same amount each year or grow it only occasionally.
I am an Income investor and I want a steady reliable stream of income from my investments. MAIN has provided that over the years.
Source: Q4 Earnings Presentation
Another feature of MAIN that is important to me is that it has never decreased its monthly dividend payment. Given the impact of COVID on the economy and a lot of businesses, that is fairly impressive. I also like that since its IPO in 2007, MAIN has increased the monthly dividend by 86%. Had I bought it at the IPO, my $15 a share would have earned me over $30 in dividends and be worth around $40 (based on the company's declared dividends to June). That is a fairly substantial income. And while I don't focus so much on capital appreciation, the increase in share price is also fairly impressive.
In the price chart above, we can see the impact that COVID had on MAIN. The drop in share price was quite large, larger than the market dropped. For those with money, this represented a very good opportunity to pick up shares of MAIN at very low prices. Even if one didn't buy at the bottom, there was plenty of opportunities to buy shares in the low to mid $20s.
MAIN has over the years traded at a premium to NAV of around 60%. This is due to the history of increasing NAV and the dividend and the confidence that the market has in management. This premium to NAV also helps MAIN grow in that because it can sell shares at some much above NAV, it has a good source of relatively inexpensive funding. As we can see in the graph above, April and May last year was a particularly good time to buy MAIN, as the premium was well below historical levels and the share price was even briefly at a discount to NAV. My biggest regret was not buying more shares of MAIN at that time.
Q4 Earnings Report
The chart below is one I have included in every article I have written on MAIN because it presents all the important metrics for MAIN in a single graph. We can see the monthly dividend payment plotted right next to DNII (Distributable Net Investment Income) which is where the cash to pay the monthly dividend comes from. And so we can see why MAIN is able to grow the dividend and how well covered the dividend is. We can see the impact that COVID had on the cashflow that MAIN uses to pay the monthly dividend. Like it did in the last recession, this cashflow dropped. And just like in the past, the cashflow recovered. In Q4 DNII was again more than the dividend. While there was a steep drop-off, the recovery was just as quick. This bodes well going into 2021 as the economy continues to recover from COVID.
Source: Q4 Earnings Presentation
Plotted on this single slide as well is the NAV. And we can see the upward trend from years past. We also see the hit NAV took from COVID and the recovery.
Finally, we see the upward stair-step pattern of regularly increasing dividends. We are at a slightly longer than usual period since the last dividend increase, but we can see that this is what happened during the last recession. With DNII again larger than the dividend payments, it shouldn't be too long before the dividend is increased.
Source: Q4 Presentation
The graph with DNII and dividends looked like DNII was higher, but the values were close. The slide above shows actual numbers. And DNII for Q4 was $0.63 a share and the monthly dividends of $0.205 a month totaled $0.615 for the quarter. Total investment income was up from a year ago, and interest expenses were down (both 3% coincidentally). These increases offset the big increase in G&A expenses to produce a flat NII. 2020 was a tough year and likely presented management with quite a few challenges so the big increase in G&A expenses doesn't concern me, provided this isn't the start of a trend. I will need to keep an eye on this going forward.
What is a good price?
To figure out a good price, I do a DDM calculation using my Excel® based DDM calculator (pictured below, you can see the web-based calculator I based it on here and read a discussion on how the formulas were developed here). I also found this discussion of DDM, and note that in the article the author uses a discount rate of 5%.
Looking at the David Fish CCC List(which contains data on companies that have raised their dividend each year for 5 or more years) I see MAIN has a 10-year streak of annual dividend increases. It has until the end of this year to increase the dividend in order to maintain the streak. Currently, the dividend is 20.5 cents a month. So conservatively, over the next 12 months, the regular dividends will total $2.46.
Using the manual feature of my DDM calculator, I am going to project that MAIN keeps the dividend at $0.2050 a month for the next 24 months and then will increase the monthly dividend by 0.5 cents each of the next 4 years. And then as I do with higher yield shares, I will assume a 0% terminal growth rate for the dividend. I expect MAIN to do better than this, but I want to be conservative.
Source: Company dividend information and author's calculations
So, using those parameters, I calculate that the NPV (Net Present Value) of the predicted dividend stream is $41.66. Because MAIN is trading at a higher than average premium to NAV, I will discount that 5% to give me an extra margin of safety. That sets my buy under price for MAIN at $40 a share. With the closing price of $39.85 on April 2, MAIN is currently selling at a good value.
Conclusion
MAIN is and continues to be one of the most consistent business development companies out there. With consistent long term growth in NAV, DNII, and dividends it stands out from the crowd.
While COVID hit it hard in 2020, MAIN has mostly recovered. I expect that as people get vaccinated (I get my second shot next week) the economy will continue to open and we will see strong growth. This should bode well for MAIN.
While the current price is well above the lows from last year, I think it is still a good value. For income investors, a purchase below $40 can give them a very attractive income stream that has been tested in 2 recessions.
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This article was written by
PendragonY is a software engineer and has been developing applications for various industries for over 30 years. He has been managing his own investments for 40+ years. Formerly a value investor, he switched over to a more income based approach after the 2008 financial crisis
. PendragonY contributes to the investing group Learn more .Analyst’s Disclosure: I am/we are long MAIN. 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.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (303)
It sounds like you might be planning to put the money to work in other BDCs. Is that correct? If so which and how did you make your determination?
I had been slowly redeploying the funds elsewhere and had reduced it from 1250 to 500 earlier mainly to the slowness of returning to normal following the Pandemic and so while still waiting and looking at other dividend payers the balance of about .62 a quarter was small compared to some higher payers and some went to CSWC and some when to MO and some went to NNN. I am somewhat concerned about NHI as well but have made no decision on decision as of yet as I have 675 shares and have had it since 2015 but growth wise up 8%. Mostly it has to do with reviewing every holding and looking to improve it .Allday
Since MAIN's investment acumen hasn't increased that much over last year, I would think that the increase in price of their stock should have been more close to its rise in NAV.
Why don't you do an experiment. Using all the inputs that you used for MAIN in your DDM calculator, simply insert $0.48 for the next 12 months dividends. What Buy Under Price with Margin of Safety does that produce?I bet it would provide a number a whole lot higher than my NAV estimate for OCSL as of 3/31/21, $7.10. I certainly would pay that much for OCSL. I ran the numbers myself just now. See what you get.
@PendragonY
Why don't you do an experiment. Using all the inputs that you used for MAIN in your DDM calculator, simply insert $0.48 for the next 12 months dividends. What Buy Under Price with Margin of Safety does that produce?
I bet it would provide a number a whole lot higher than my NAV estimate for OCSL as of 3/31/21, $7.10. I certainly wouldn't pay that much for OCSL. I ran the numbers myself just now. See what you get.
By the way your link in the article refers me to a model that estimates a price based on earnings and earnings growth, not on dividends. Your whole valuation thesis for MAIN based on that is wrong.
Good that you pointed out that MAIN usually sells for a big premium to NAV because the last SA author I read seemed to insinuate that it was the most overvalued BDC because it was selling for the most above NAV of any BDC and that was when it was still selling for $30!
Could this not be a cause for a future distribution cut or at least causing MAIN to increase their leverage?
I also find it of interest that MAIN continues to need to pay more for their unsecured debt that ARCC. That premium tells me that institutional investors consider their debt more risky.
But thanks for sharing your opinioncefdata.com/...
I’m fine with the shares getting called away. They are in my opinion over valued past $36 a share. I’ll be writing cash secured puts at $35 to buy the MAIN shares back at a price I consider reasonable."I think your valuation is too low, but those are the rules I use when I write options. I don't write a call unless I am willing to have the shares called at that strike or write a put unless I am willing to buy the shares at the strike.
But we all have our differences when investing .I can always sell and buy something else.
Wishing the best for all that hung in thereAllday
Sure you can always sell and buy something else...
The challenge is finding equal or better quality and performance at the right price. I'm up 137% holding Main until the company turns south or I go first.
Happy investing