Monroe Capital Corp: Is This 10.4% Yield Safe?
Should Investors Consider This High-Yield Stock?
Despite being in a market with bloated valuations and low yields, income investors can still find high-dividend stocks. Using any of the stock screeners available on the Internet, you will easily find companies paying 10% or more.
The problem is, though, that double-digit yielders can be risky. Quite often, a company is able to offer a jaw-dropping yield only because its share price plunged.
In other words, ultra-high yielders tend to be down-and-out stocks.
And while we are constantly on the lookout for good deals, the stock market can be efficient. Sometimes, a stock is down for a good reason. In the case of ultra-high yielders, the No. 1 investor concern is dividend safety, or rather the lack of it.
Therefore, when Monroe Capital Corp (NASDAQ:MRCC) stock—which currently yields 10.4%—popped up on my radar, I had to ask the question, “Is the dividend safe?”
To answer that question, let’s first take a look at what the company does for a living.
Monroe Capital Corp: A Specialty Finance Company
Monroe Capital Corp is a closed-end investment management firm headquartered in Chicago, Illinois. To be more specific, the company provides financing solutions primarily to middle-market businesses in the U.S. and Canada.
Monroe Capital Corp’s portfolio includes many different types of investments, including senior, unitranche, and junior secured debt, as well as unsecured subordinated debt and equity. However, the company has been putting an increasing emphasis on investing in first-lien loans.
Two years ago, first-lien senior secured loans accounted for 75.1% of Monroe Capital Corp’s total portfolio. Today, the share of first-lien debt has increased to 85.9%. (Source: “Company Overview,” Monroe Capital Corp, last accessed July 13, 2018.)
For those not in the know, focusing on first-lien debt can greatly improve a portfolio’s risk profile. When a lender has a first-lien position, they will have priority in case the borrower defaults and the collateral is liquidated to settle the debt.
Other than investing mostly in senior secured debt, Monroe Capital also manages its risk by diversifying. As of March 31, 2018, the company’s $496.0-million portfolio was diversified across 134 loans and 22 equity positions from 72 portfolio companies.
These companies came from all kinds of industries. Monroe Capital’s largest industry exposure—Healthcare & Pharmaceuticals—represented just 13% of its total portfolio fair value at the end of the first quarter.
A Generous Dividend Payer
By running what’s mostly a lending business, the company can collect a predictable stream of interest payments. And because Monroe Capital Corp is structured as a business development company, it has to return at least 90% of profits to shareholders through dividends.
Today, MRCC stock has a quarterly dividend rate of $0.35 per share, which translates to an annual yield of 10.4%.
To see whether the payout is safe, all you need to do is take a look at its latest annual and quarterly earnings reports.
In 2017, Monroe Capital Corp generated a net investment income of $26.0 million, or $1.40 per share. Given its total dividends of $1.40 per share paid for the year, the company made just enough money to cover its payout. (Source: “Monroe Capital Corporation BDC Announces Fourth Quarter And Full Year 2017 Financial Results,” Monroe Capital Corp, March 14, 2018.)
In the first quarter of 2018, Monroe Capital Corp’s net investment income came in at $8.5 million, or $0.42 per share. This provided more than enough coverage of its quarterly dividend payment of $0.35 per share. (Source: “Monroe Capital Corporation BDC Announces Strong First Quarter Results,” Monroe Capital Corp, May 8, 2018.)
The company does not have a very long track record of paying dividends, but that’s because it completed its initial public offering in 2012. Still, since Monroe Capital went public, the company has never cut its payout. It even raised its quarterly dividend rate by $0.01 per share in 2015. (Source: “Dividends & Distributions,” Monroe Capital Corp, last accessed July 13, 2018.)
Looking back, Monroe Capital’s adjusted net investment income has covered its dividend for 16 consecutive quarters. While past performance cannot guarantee future results, the company’s latest financials suggest that the dividend is safe, for now.