Monroe Capital Corp: Can You Count on This 11.9% Yield?

Monroe Capital Corp Can You Rely on This Yield of 11.9%

A Double-Digit Yielder Most People Have Never Heard of

To most people, Monroe Capital Corp (NASDAQ:MRCC) won’t be a familiar name. As a business development company (BDC) headquartered in Chicago, Monroe Capital stock doesn’t really make headlines in the financial media.

Still, the company deserves investors’ attention for a very simple reason: it offers a higher dividend yield than the vast majority of stocks trading in today’s market.

Last month, Monroe Capital declared a quarterly cash dividend of $0.35 per share. Based on the MRCC stock price of $11.79 per share as of this writing, that quarterly dividend rate comes out to a staggering annual yield of 11.9%.

Of course, when most stocks don’t even pay half as much, an ultra-high yield like this could be a sign of trouble. So the big question now is, can investors count on Monroe Capital stock’s 11.9% yield?

Is the Dividend Safe at Monroe Capital Corp?

To answer that question, let’s first take a look at how the company makes money.

Monroe Capital provides financing solutions to middle-market businesses. It makes both debt and equity investments but has a strong focus on senior secured lending. As of March 31, the company had a $596.9-million investment portfolio diversified across 80 different companies. (Source: “Company Overview Q1 2019,” Monroe Capital Corp, last accessed June 11, 2019.)

Around 90% of the portfolio was made up of first-lien loans, providing the company with a predictable and relatively secure interest income stream.

By the end of March, Monroe Capital’s investment portfolio had a weighted average annualized effective yield of 10%.

Like most BDCs, Monroe Capital reports something called “net investment income.” In order for a BDC’s dividend to be deemed safe in a given reporting period, it needs to generate a net investment income that’s no smaller than its dividend payment.

Last year, Monroe Capital earned an adjusted net investment income of $1.57 per share. Its dividend payments, on the other hand, totaled $1.40 per share. That is, the company was paying out less than 90% of its adjusted net investment income, which leaves some room for safety. (Source: “Monroe Capital Corporation BDC Announces Fourth Quarter And Full Year 2018 Results,” Monroe Capital Corp, March 5, 2019.)

For the first quarter of 2019, Monroe Capital generated an adjusted net investment income of $0.35 per share while paying $0.35 per share in dividends. In other words, while the amount covered the dividend, it did not leave any margin for error. (Source: “Monroe Capital Corporation BDC Announces First Quarter 2019 Results,” Monroe Capital Corp, May 7, 2019.)

I should point out that, in the past, there were a quite a few times when the company’s adjusted net investment income met, but did not exceed, its dividend payments in a reporting quarter. However, Monroe Capital has never cut its payout.

As a matter of fact, the company has been paying uninterrupted quarterly dividends since its initial public offering in October 2012. And it even increased its payout in March 2015. (Source: “Dividends and Distributions,” Monroe Capital Corp, last accessed June 11, 2019.)

Furthermore, the first quarter of 2019 marked the 20th consecutive quarter that Monroe Capital’s adjusted net investment income has covered its dividend.

“We believe that the full quarter impact of portfolio investments made during the first quarter, coupled with the continued portfolio growth in the second quarter should continue to increase our core per share NII,” said Aaron Peck, Chief Financial Officer and Chief Investment Officer of Monroe Capital. (Source: “Monroe Capital Corp (MRCC) CEO Theodore Koenig on Q1 2019 Results – Earnings Call Transcript,” Seeking Alpha, May 8, 2019.)

“We continue to believe that our adjusted NII can cover our dividend assuming no other material changes in our portfolio,”

The Bottom Line on Monroe Capital Stock

Ultimately, there are companies that have a much wider margin of safety in their dividend policies. But note this: among stocks yielding 10% or more, Monroe Capital Corp’s dividend coverage is already on the stronger end. For investors who want to use high-yield stocks to boost the returns of their income portfolios, MRCC stock deserves to be added to their watchlists.

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