Crescent Capital BDC Inc: A 10.6% Yielder Most People Have Never Heard Of
Looking for Oversized Yield? Read This
Even though the stock market seems to be overly euphoric—which is not exactly a good thing for value-conscious income investors—there are plenty of under-the-radar tickers that provide extremely generous dividends.
Crescent Capital BDC Inc (NASDAQ:CCAP), for instance, is a name that most people have never heard of. But the company stands out due to the sheer size of its cash payouts.
Crescent Capital went public by acquiring Alcentra Capital Corporation (formerly NASDAQ:ABDC). CCAP stock started trading on the Nasdaq on February 3, 2020, which, in hindsight, was probably not the luckiest time to go public. The stock market took a huge tumble in March 2020 due to the COVID-19 pandemic, and numerous stocks—including Crescent Capital stock—plunged during the sell-off.
The good news was that, after the initial drop, CCAP stock quickly started recovering. In fact, since its March 2020 low, the company’s share price has more than doubled.
And while there’s an inverse relationship between dividend yield and stock price, because Crescent Capital stock’s payout was so huge to begin with, it remains an ultra-high yielder even after the climb.
Today, Crescent Capital BDC Inc has a quarterly dividend rate of $0.41 per share and a share price of $15.45. That translates to an annual yield of 10.6%.
Now, you may be wondering how Crescent Capital can afford this level of payout when the vast majority of dividend stocks yield less than five percent.
Well, Crescent Capital is a business development company (BDC) that specializes in originating and investing in the debt of private U.S. middle-market companies. It’s regulated under the Investment Company Act of 1940. With its BDC status, Crescent Capital pays little to no income tax at the corporate level. In order to maintain its BDC status, the company must return at least 90% of its profits to investors in the form of dividends.
In other words, Crescent Capital BDC Inc acts kind of like a tax pass-through, which is one of the reasons it pays hefty dividends.
Another reason is its lucrative lending business. As I just mentioned, Crescent Capital focuses on providing financing solutions to middle-market businesses. These businesses aren’t always able to get large loans from banks. As a result, they often have to pay higher costs to obtain financing. By lending to middle-market companies, Crescent Capital earns oversized interest income.
According to the BDC’s latest investor presentation, the weighted average yield of its income-producing securities was 7.9% as of September 30, 2020. (Source: “Quarterly Earnings Presentation for the Quarter Ended September 30, 2020,” Crescent Capital BDC Inc, last accessed January 28, 2020.)
Crescent Capital’s portfolio was diversified across 128 companies in 20 different industries. The top three industry exposures were health-care equipment and services (22%); commercial and professional services (19%); and software and services (14%). Notably, 78% of the company’s portfolio consisted of first-lien senior-secured and unitranche investments by fair value.
Now, your next question is likely: Is the dividend safe?
Well, high-yield stocks are not known for their dividend safety. But according to Crescent Capital’s most recent earnings report, the BDC managed to outearn its dividends.
In the third quarter of 2020, Crescent Capital earned net investment income of $0.43 per share, which was in excess of its quarterly dividend payment of $0.41 per share. (Source: “Crescent Capital BDC, Inc. Reports Third Quarter 2020 Financial Results; Declares a Fourth Quarter 2020 Regular Dividend of $0.41 per Share,” Crescent Capital BDC Inc, November 4, 2020.)
Crescent Capital BDC Inc: Good Value for Money?
Last but certainly not least, BDCs tend to report their net asset value on a quarterly basis. In the case of Crescent Capital BDC Inc, its most recently reported net asset value was $19.07 for September 30, 2020.
However, CCAP stock trades at $15.45 per share at the time of this writing. This implies, if the company’s fundamentals haven’t changed much over the past few months, the price of Crescent Capital stock would represent a near-19% discount compared to its net asset value.
Combining that with a double-digit dividend yield, this little-known stock deserves the attention of yield-seeking investors.