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Capital Southwest: Another Dividend Hike Likely For This 11.9%-Yielding BDC

Feb. 14, 2023 7:07 PM ETCapital Southwest (CSWC)92 Comments


  • We discuss quarterly results from business development company Capital Southwest and highlight key income dynamics of the portfolio.
  • Capital Southwest delivered a respectable 1.5% total NAV return over the quarter, raising its base dividend once again.
  • Net income should continue to increase over the rest of the quarter with a strong chance of another dividend hike in the near term.
  • Capital Southwest trades at an 11.9% total dividend yield and 120% valuation.
  • I do much more than just articles at Systematic Income: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

Business And Finance Concept Of A Bull Market Trend High Quality


This article was first released to Systematic Income subscribers and free trials on Feb. 7.

In this article we discuss the latest quarterly results from the business development company ("BDC") Capital Southwest (NASDAQ:CSWC). The company delivered

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This article was written by

ADS Analytics profile picture

ADS Analytics is a team of analysts with experience in research and trading departments at several industry-leading global investment banks. They focus on generating income ideas from a range of security types including: CEFs, ETFs and mutual funds, BDCs as well as individual preferred stocks and baby bonds.

ADS Analytics runs the investing group Systematic Income which features 3 different portfolios for a range of yield targets as well interactive tools for investors, daily updates and a vibrant community.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such 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.

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 (92)

willpetty profile picture
@ADS Analytics I learned a lot from this thank you and the company looks like it has been well run since 2016.

However you write: Separately, the company has generated an amazing 5.6% in total NAV return just from accretive share issuance over the past 4 quarters.

Should this not send alarm bells to those interested in fundamentals and the medium or long term?
ADS Analytics profile picture
@willpetty why would share issuance raise an alarm bell?
willpetty profile picture
@ADS Analytics just a question - issuing shares is driving up their own nav? Buybacks I understand but this seems like a vote of confidence in the future...?
ADS Analytics profile picture
@willpetty Buybacks drive up the NAV when the price is at a discount to NAV. Issuing new shares drives up the price is at a premium to NAV.
Divvy hike announced this afternoon. Plus the .05 special. finance.yahoo.com/...
BartAtTheRanch profile picture
@patient speculator

The Press Release was here on SA - why aren't comments like this showing up there? And why didn't SA run a "News" story on it, rather than just the PR (which most folks don't read)?

@BartAtTheRanch I was also wondering why SA did not run a press release on CSWC's announcement of an increase in the regular dividend and then an additional supplemental dividend of 5 cents?
I just figured the "writers of SA" were falling behind on their work and that eventually (either late last night or sometime this morning), the news release would be posted on the SA site. I guess time will tell.
In any event and most importantly, the corporate governance of CSWC is fantastic. Talk about a management team that is superb and aligned with shareholders - they are the best in the business and my largest stock position.
BartAtTheRanch profile picture

Well as you have seen by now, they got to it. I guess it was delayed by he crush of results coming in.

Jcb331 profile picture
CSWC pre earnings report- All the good things up, leverage down.

"Capital Southwest’s preliminary estimate of its fourth quarter 2023 pre-tax net investment income is in the range of $0.64 to $0.65 per share. The preliminary estimate of its net investment income for the same period is in the range of $0.63 to $0.64 per share. Capital Southwest’s preliminary estimate of its net asset value per share as of March 31, 2023 is in the range of $16.30 to $16.40. Finally, Capital Southwest’s preliminary estimate of its regulatory leverage as of March 31, 2023 is in the range of 0.86x to 0.90x debt to equity."

BartAtTheRanch profile picture

Indeed. That leverage would be a modest drop, providing a bit more runway for CSWC. All very good numbers. We hope also to see no new non-accruals and a lowered percentage. of PIK income. Bart
Just out from CSWC: "Capital Southwest’s preliminary estimate of its fourth quarter 2023 pre-tax net investment income is in the range of $0.64 to $0.65 per share. The preliminary estimate of its net investment income for the same period is in the range of $0.63 to $0.64 per share. Capital Southwest’s preliminary estimate of its net asset value per share as of March 31, 2023 is in the range of $16.30 to $16.40. Finally, Capital Southwest’s preliminary estimate of its regulatory leverage as of March 31, 2023 is in the range of 0.86x to 0.90x debt to equity."
Investrava Analytics profile picture
Thanks for article. CSWC is top class BDC with very long track record with growing distributions
@KMR holder holder
All instruments have risks even treasuries, it all depends on your tolerance (cheapness).
anyone buying here?
KMR holder profile picture
@mtm265 Give me a good price and I'll buy some!
500MPH profile picture
I think buying the dip in anything is over for awhile
RixRixx profile picture
@mtm265 I bought more today @ $17.07
I have another order in for all of next week @ $16.06
Hope that one doesn't get filled. Lol.
SleepyInSeattle profile picture
CSWC — vs. Other BDCs By Price/NAV
Rank BDC Price/NAV
#1 MAIN 1.58x
#2 HTGC 1.51x
#3 NEWT 1.19x
#4 CSWC 1.17x
#5 TSLX 1.15x
#6 SCM 1.13x
#7 GLAD 1.12x
#8 GSBD 1.09x
#9 FDUS 1.08x
CapSW is my largest BDC holding among many BDCs. Passive income just pouring in. Pass me the lobster tails, will ya?
big8pointer profile picture
Same with me. Love those big quarterly dividend payouts hitting my account!
Thank you. Just a side note, CSWC is still in partnership with MAIN. Good luck fellow investors.
500MPH profile picture
Can you explain future possible implications of this partnership?
@fastmph Thank you for your reply. I submitted a request asking for information to/from MAIN. I am just awaiting their reply.
BartAtTheRanch profile picture
@ADS Analytics

What are the numbers of these averages for the stocks you follow? Are those averages for the set of BDCs thatyou include in your weekly charts of BDC performance by ticker?

"CSWC has a larger than average secured loan focus, with a larger allocation to first-lien loans than the average BDC."

Thanks for the article!

ADS Analytics profile picture
@BartAtTheRanch Averages refer to the 29-name universe of BDCs I cover
DKB2 profile picture
@ADS Analytics
Good to have more coverage of the BDC universe...Thanks!

First lien loans as a percentage of a BDC's total loans would be more illuminating.

BDC financing costs have been increasing.
Would you consider an article comparing those cost increases on a year over year basis?

Happy Trails...
ADS Analytics profile picture
@DKB2 87% first-lien loans. Higher financing costs are just one piece of the puzzle. CSWC don't appear to disclose it so I didn't mention it. I do mention it for the other BDCs. In any case, net income has grown overall which is the good result.
Damon Judd profile picture
Great writeup. Glad that I recently added this BDC back to my income portfolio. Sounds like they are in good shape heading into 2023.
If attractive opportunities are out there management should continue to issue equity at a premium to fund. Long in Roth and like that cswc is internally managed.
@stompers54 But the premium is over 18%. It is maddening. I will open a position when it drops significantly. Before then, not me.
Lallemand profile picture
@Bemylov You don't accept to pay a premium for good BDC teams, even with an internal team? Premiums apply to well managed financial companies, Banks (look at JPM) or BDCs (Main, HTGC, CSWC, TSLX). A BDC with a good internal team is not that different from a well managed bank, and well managed banks stocks have huge premiums to book value. A well managed BDC, even with an external team, may also deserve a premium, see TSLX. Actually the most discounted BDCs destroy value every year and I prefer to pay a (reasonable) premium to have teams creating value for me than to invest in bad teams which destroy value and eat the discount due to their bad results, year after year. Quality always has a price. Long CSWC, HTGC, TSLX and a few others, and very happy.
KMR holder profile picture
@Lallemand I don't pay a premium for any stock and a BDC is a very special type of stock. They don't have a profitable product. You are buying a portfolio of loans and the expectation that the manager will be able to produce additional growth in the future after expenses and distributions.
By paying premium prices to own a BDC and holding it at a premium, an investor is willingly accepting less income than the portfolio of loans will produce for the inherent risk.
As the author pointed out, if the management of CWSC had not been able to issue more shares at a premium, it would have had minimal gains from its portfolio of investments. Premium prices produce less returns for the investor. Look at yield on NAV. It was much greater than current yield, even after accounting for investment losses. The fact that the current yield is so much lower than the yield on NAV can be partly explained as a result of the fact that the management makes higher risk loans and investors must carry that risk while overvaluing the shares.
By paying a premium price to own CSWC, you are in effect subsidizing management's risky investments.
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