Should Investors Consider This Ultra-High Yielder?
In the investment world, markets can be efficient. This means that if something seems too good to be true, it probably is.
Still, it’s hard to pass up the opportunity of owning a stock that pays you a cash return of more than 10%.
I’m talking about Corporate Capital Trust Inc (NYSE:CCT), a business development company (BDC) headquartered in San Francisco.
At first glance, CCT seems like one of those “too good to be true” stocks. With a quarterly dividend rate of $0.402 per share, the company offers a jaw-dropping annual yield of 11.6%.
To put this in perspective, the average dividend yield of all S&P 500 companies is just 1.9% at the moment. (Source: “S&P 500 Dividend Yield,” multpl, last accessed December 4, 2018.)
So, what exactly does this ultra-high yielder do to afford to make these payouts?
Well, in my opinion, the best way to look at Corporate Capital Trust is to think of it as an alternative bank.
Banks make money by lending it out at a higher interest rate than they borrow at, pocketing the difference. This successful business model has been working through thick and thin for centuries. And thanks to their recurring profits, banks are also known for paying handsome dividends.
Collect Oversized Payouts From This Alternative Bank
Corporate Capital Trust is not a bank in the traditional sense because it does not lend to consumers like you and me. Instead, the company focuses on making originated, senior secured loans to middle-market businesses.
Because middle-market companies are not as established as their large-market counterparts, banks aren’t always willing to lend to them. As a result, these businesses are willing to pay higher interest rates to get financing. And that allows middle-market lenders to earn oversized profits.
In the case of Corporate Capital Trust, the company’s portfolio produced a weighted average annual yield of 10.4% at the end of the third quarter. (Source: “Corporate Capital Trust, Inc. Quarterly Earnings Presentation,” Corporate Capital Trust Inc, last accessed November 29, 2018.)
If you are worried about the risk associated with high-yield debt, keep in mind that CCT’s portfolio is well-diversified. As of September 30, 2018, Corporate Capital Trust Inc had investments in 140 companies coming from 24 different industries.
And while middle-market firms are not the most established, CCT does not invest in startups. To give you an idea, CCT’s median portfolio company can generate annual earnings before interest, taxes, depreciation, and amortization (EBITDA) of around $58.0 million.
Furthermore, Corporate Capital Trust Inc focuses on making senior secured loans. At the end of the third quarter, the company had 39.1% of its portfolio invested in first lien loans, and another 24.3% invested in second lien loans.
When you are a first lien lender, you would be the first one in line to get paid in the event of borrower liquidation.
Corporate Capital Trust Inc: Is the Payout Safe?
Like most ultra-high yielders, Corporate Capital Trust Inc is not perfect. In the third quarter of 2018, the company earned a pro forma net investment income of $49.3 million, or $0.40 per share. This came in just shy of its regular cash dividend of $0.402 per share paid during the quarter. (Source: “Corporate Capital Trust, Inc. Reports Third Quarter 2018 Results,” Corporate Capital Trust Inc, November 7, 2018.)
However, management remains determined to return cash to investors. During the earnings conference call, CCT’s Chief Operating Officer Ryan L.G. Wilson said, “We expect to declare a fourth quarter dividend of at least $0.40 per share, subject to Board approval.” (Source: “Edited Transcript,” Corporate Capital Trust Inc, last accessed November 29, 2018.)
Also worth mentioning is that the company is well-positioned to capitalize on the rising interest rate environment. By the end of September 2018, 75% of Corporate Capital Trust’s debt investments bore interest at floating rates. So if rates go up, the company could earn some extra investment income.
There you have it. Corporate Capital Trust is not the perfect dividend stock. But for those who understand the underlying risks with this BDC, its double-digit yield could be an opportunity.