MRCC Stock: A 9.8% Yielder That Could Benefit from Rising Interest Rates
Consider This High-Yield Stock
If you own a portfolio of high-yield stocks, there’s one thing you should definitely pay attention to—rising interest rates.
Due to the last financial crisis and the ensuing economic recession, the U.S. Federal Reserve kept the federal fund’s rate near zero for more than seven years. More recently, however, it’s raising rates again.
Since December 2015, the Fed has raised its benchmark interest rates a total of five times to a range of 1.25% to 1.5%. And that was just the start; the U.S. central bank is forecasting as many as three rate hikes for 2018. (Source: “Fed lifts interest rates but sticks to go-slow approach as Yellen era nears end,” MarketWatch, December 13, 2017.)
Higher interest rates mean a higher cost of borrowing. Most companies—including those that offer oversized dividend yields—have debt. When interest rates rise continuously, the companies’ debt repayment burdens also increase.
At the same time, a higher interest rate environment could also impact the market’s overall valuation of dividend stocks. The reason is simple: with higher interest rates, there will likely be higher-yielding fixed income opportunities, and those opportunities could compete with the regular distributions offered by dividend paying companies.
Of course, not all dividend stocks are doomed under rising interest rates. Monroe Capital Corp (NASDAQ:MRCC), for instance, is set to prosper when the Fed raises its benchmark interest rates again.
Headquartered in Chicago, Illinois, Monroe Capital Corp is a business development company (BDC). It provides financing solutions to lower-middle-market companies in the U.S. and Canada. As of September 30, 2017, Monroe Capital has debt and equity investments in 66 portfolio companies, with a total fair value of $431.1 million. (Source: “Monroe Capital Corporation BDC Announces Strong Third Quarter Financial Results,” Monroe Capital Corp, November 7, 2017.)
The neat thing is that approximately 86.5% of the company’s portfolio is made up of first-lien secured loans. This means if the borrower goes through liquidation, Monroe Capital will be the first one in line to get paid.
The company’s focus on senior secured lending also allows it to earn a steady stream of interest income. And because Monroe Capital is structured as a BDC, it must pay out a minimum of 90% of its profits to investors in the form of dividends.
Right now, the company pays quarterly dividends of $0.35 per share, giving MRCC stock an annual yield of 9.8%. And unlike many businesses that are worried about higher interest rates in the future, Monroe Capital actually sees rate hikes as catalysts.
In fact, during the most recent earnings conference call, the company’s chief executive officer, Ted Koening, said explicitly that, “MRCC is well situated to meaningfully benefit from any increase in short-term interest rates, going forward.” (Source: “Monroe Capital’s (MRCC) CEO Ted Koenig on Q3 2017 Results – Earnings Call Transcript,” Seeking Alpha, November 8, 2017.)
Why is the CEO so confident? Well, because the majority of loans in Monroe Capital’s portfolio are floating rate, while most of its borrowings are the fixed rate. Management estimated that if interest rates rise by 100 basis points, the company will earn an extra $3.85 million in annual interest income, while annual interest expense will only go up by $606,000. The net effect will be a $3.24 million increase in Monroe Capital’s annual net investment income. (Source: “Form 10-Q,” Monroe Capital Corp, November 7, 2017.)
With multiple rate hikes expected in 2018, the company could generate substantially higher profits. And since management is willing to return value to investors through dividends, more profits could translate to bigger payouts down the road.