Crescent Capital BDC Inc: 8.8% Yield from This “Alternative Bank” Is No Joke
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If you’re looking for oversized dividends in today’s low-yield environment, a group of companies I’ve dubbed “alternative banks” could be worth a look.
I call them alternative banks because they make money by lending capital out at higher interest rates than they borrow it at—similar to how traditional banks make money. However, they differ from traditional banks because they don’t serve retail customers like you and me.
In the case of Crescent Capital BDC Inc (NASDAQ:CCAP), an alternative bank based in Los Angeles, the company serves middle-market businesses in the U.S.
To be precise, Crescent Capital is structured as a business development company (BDC).
The main appeal of alternative banks is the size of their payouts. Crescent Capital BDC Inc currently pays $0.41 per share on a quarterly basis and, as of this writing, has a share price of $18.59. Simple math shows that CCAP stock is offering an annual dividend yield of 8.8%.
Obviously, in an era when most companies don’t even pay four percent, an 8.8% yield can seem too good to be true. Moreover, many investors learned the hard way last year that dividends aren’t carved in stone. In fact, because of the COVID-19 pandemic, even some traditional banks had to cut their cash payouts to shareholders at the height of the crisis.
So, why bother with a high-yield alternative bank?
First of all, while Crescent Capital is a high yielder, its payout has remained resilient so far.
The company went public on February 3, 2020, which was just a few weeks before the pandemic started sending shock waves across the economy and stock market.
However, Crescent Capital stock’s quarterly dividend rate was $0.41 per share at the time of its initial public offering (IPO)—and, as mentioned earlier, remains at $0.41 per share. So, although many companies—including some of Crescent Capital’s BDC peers—had slashed their payouts over the past year, CCAP stock investors didn’t get a pay cut. (Source: “Dividends,” Crescent Capital BDC Inc, last accessed June 7, 2021.)
One of the reasons behind Crescent Capital stock’s durable dividends is the company’s disciplined portfolio construction.
Crescent Capital’s $1.1-billion portfolio is diversified across 131 companies in more than 20 different industries. The median borrower generates a substantial $29.0 million in annual earnings before interest, taxes, depreciation, and amortization (EBITDA). Furthermore, 80% of the BDC’s portfolio was invested in first-lien loans, meaning if the borrower goes through liquidation, Crescent Capital will be the first one standing in line to get paid. (Source: “Quarterly Earnings Presentation,” Crescent Capital BDC Inc, March 31, 2021.)
It helps that 98% of Crescent Capital’s debt investments (based on fair value) bear interest at floating rates. So if interest rates increase—which is what many market participants are expecting—Crescent Capital will earn higher interest income from those loans.
Looking at the financials, in 2020, Crescent Capital earned net investment income of $1.80 per share while declaring four quarterly dividends totaling $1.64 per share. So the company covered its payout last year, which was a pretty impressive feat, considering how badly the economy was impacted by the pandemic. (Source: “Crescent Capital BDC, Inc. Reports Full Year and Fourth Quarter 2020 Financial Results; Declares a First Quarter 2021 Regular Dividend of $0.41 per Share,” Crescent Capital BDC Inc, February 24, 2021.)
In the first quarter of 2021, Crescent Capital’s net investment income came in at $0.41 per share—the same as its quarterly dividend rate. Excluding capital gains-based incentive fees, the company earned adjusted net investment income of $0.46 per share, which was in excess of its cash payout. (Source: “Crescent Capital BDC, Inc. Reports First Quarter 2021 Financial Results; Declares a Second Quarter 2021 Regular Dividend of $0.41 per Share,” Crescent Capital BDC Inc, May 12, 2021.)
Bottom Line on Crescent Capital BDC Inc
At the end of the day, there are stocks with higher yields than Crescent Capital BDC Inc. There are also companies with safer payouts than those in the BDC sector (think, for instance, of blue-chip consumer staples companies). But the ultra-high yielders rarely offer dividend safety, and the safer blue-chip companies don’t pay nearly as much in terms of yield.
And that, my dear reader, is why CCAP stock deserves investors’ attention.