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PennantPark Investment Corp: Can You Count on This 10% Yielder? Income Investors 2018-10-30 15:39:21 PennantPark Investment Corp PNNT PNNT stock NASDAQ PNNT PennantPark Investment pennantpark stock PennantPark Investment Corp (NASDAQ:PNNT) stock offers a generous dividend yield of 10%. But can investors count on that return? PennantPark Stock

PennantPark Investment Corp: Can You Count on This 10% Yielder?

Little-Known Stock With a Big Payout

Most people have never heard of PennantPark Investment Corp (NASDAQ:PNNT), but the company offers one of the biggest payouts in the current stock market.

Headquartered in New York City, PennantPark Investment Corp is a business development company. It was founded in 2007 and has survived the last financial crisis. Today, the company provides financials solutions to middle-market businesses in the U.S.

PNNT stock draws investors’ attention due to the sheer size of its dividends. With a quarterly distribution rate of $0.18 per share, the company has an annual yield of 10%.

For those wondering how PennantPark Investment Corp can afford its high payout, here’s a hint: middle-market businesses can’t always get loans from large banks. Therefore, they often have to pay high financing costs.

By lending to middle-market companies, PennantPark earns outsized interest income. By the end of June, the yield on cost of PNNT’s debt portfolio stood at 11.4%. (Source: “PennantPark Investment Corporation,” PennantPark Investment Corp, last accessed October 19, 2018.)

PNNT Stock: Is the Dividend Safe?

As an investment firm, PennantPark’s key performance metric is net investment income, which is calculated by subtracting expenses from investment income. In the most recent quarter, PennantPark Investment Corp earned a net investment income of $0.17 per share, which is just shy of its quarterly dividend rate of $0.18 per share. (Source: “PennantPark Investment Corporation Announces Financial Results for the Quarter Ended June 30, 2018,” PennantPark Investment Corp, August 8, 2018.)

Going a bit further back, things start to look better. In the first nine months of the company’s fiscal year 2018, which ended June 30, net investment income came in at $0.55 per share. This was more than enough to cover the company’s total dividends of $0.54 per share declared during the period, although the margin of safety was quite thin.

Running a Secured Lending Business

As is the case with any lending business, managing risk is of utmost importance at PennantPark. No matter how high the yield is on your lending portfolio, it wouldn’t be worth much if the borrowers start to default on their debt.

The good news is, PennantPark Investment Corp has plenty of risk management measures in place. And its track record, despite debuting right before the financial crisis, looks rather impressive.

As of June 30, 2018, more than 80% of the company’s portfolio consisted of first-lien and second-lien secured debt. Focusing on senior secured loans is certainly a welcoming sign for risk-averse investors. If you are a first lien-lender, you would be the first one standing in line to get paid if the borrower defaults and goes through liquidation.

At the same time, PennantPark Investment Corp runs a diversified portfolio. By the end of June, the company’s $1.03 billion portfolio was diversified across 51 different companies. That means the average investment size was just over $20.0 million.

Those measures have certainly worked. Since its inception, PennantPark Investment Corp had a 12.5% average yield on purchases. And yet it managed to keep its annual loss rate at around just 30 basis points.

To be more specific, PennantPark Investment Corp has invested in 204 companies since inception. Among those, only 12 turned out to be non-accruals.

In the lending business, a nonaccrual loan is one that’s not generating its stated interest income due to nonpayment from the borrower.

However, even when loans turned out to be nonperforming, PennantPark Investment Corp still has a decent chance of getting its money back. Since inception, the company has recovered around 80% of the nonaccrual loans.

A New Catalyst for PNNT Stock?

Another thing to note about PNNT stock is the interest rate environment. For the most part of the last decade, the U.S. Federal Reserve has kept its benchmark interest rates at extremely low levels. But since the Fed began normalizing policy in December 2015, it has announced eight rate hikes.

Going forward, the Federal Open Market Committee anticipates one more interest rate increase in 2018 and as many as three rate hikes in 2019. How will that affect PennantPark Investment Corp’s lending business?

Well, as it turned out, the company is very much prepared for the rising interest rate environment. Ninety-one percent of the company’s portfolio bears interest at floating rates, while most of its liabilities are in the form of fixed rate debt. Therefore, if interest rates go up, the company would earn higher interest income, while its interest expense would increase by a much less extent. As a result, PennantPark Investment Corp could earn a higher net investment income as interest rates further increase.

The Bottom Line on PNNT Stock

At the end of the day, PNNT stock might offer investors something more than its double-digit dividend yield—value.

You see, the last time PennantPark Investment Corp reported earnings, it had a net asset value of $9.09 per share. And yet, its stock trades at just $7.17 apiece. If the company’s fundamentals haven’t changed much in the last several months, its current share price would represent a substantial discount compared to its NAV.

Add up, it’s not hard to see why PNNT stock deserves the attention of yield-seeking investors.

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