12%-Yield PennantPark Stock Crushing the Broader Market
March 15, 2024
PNNT Stock Up 48% Over Last Year & Could Keep Climbing
Interest rates will soon be coming down, but probably not as quickly as most Americans hope. That’s because the U.S. economy is booming, and cutting rates prematurely could reignite inflation.
The high interest rates continue to be a great tailwind for business development companies (BDCs) like PennantPark Investment Corp. (NYSE:PNNT).
Why?
BDCs provide capital to privately held firms that need cash to expand their businesses—and there are a lot of private businesses looking for cash infusions.
Because those firms are private, you can’t invest in them directly, but BDCs, by their very structure, can. BDCs were created to invest in small and medium-sized privately held businesses.
And because of their deep pockets, each BDC can invest in dozens to hundreds of private companies. From 2002 to 2023, public BDCs ballooned from having $5.0 billion in assets to nearly $300.0 billion in total assets.
The way BDCs invest their money helps juice their ultra-high-yield distributions. Most BDCs use floating rates for the debt in their portfolio. In the current interest rate-sensitive environment, this has helped energize their bottom lines.
Moreover, since BDCs are good at finding excellent companies to invest in, they have a low default rate, just 1.6% in the fourth quarter of 2023. (Source: “Proskauer’s Private Credit Default Index Reveals Rate of 1.6% for Fourth Quarter of 2023,” Proskauer Rose LLP, January 18, 2024.)
For income investors, BDCs legally have to pay out at least 90% of their taxable income to investors as dividends, much like real estate investment trusts (REITs) do. And their dividend yields can be quite high, averaging 9.96%. That’s far superior to the average S&P 500 company, which yields just 1.47%.
PennantPark Investment Corp. is better than the average BDC; it has a yield of 12.35% (as of this writing).
More often than not, a stock’s dividend yield is so high because its underlying price is so low. This isn’t the case with PennantPark stock; it hit a new record intraday high of $7.27 on January 30.
The stock has given up some of those gains to short-term profit-taking, but it continues to trade near that level, around $6.82 per share. This puts PNNT stock up by 48% over the last year. Over the same time period, the S&P 500 has rallied by a less-impressive 34%.
Chart courtesy of StockCharts.com
About PennantPark Investment Corp.
PennantPark is a private equity fund that focuses on companies that are owned by middle-market private equity sponsors with a track record of supporting the companies in their portfolios. (Source: “Investor Presentation,” PennantPark Investment Corp., December 31, 2023.)
Why middle-market companies? The U.S. middle market includes almost 200,000 companies, generates $10.0 trillion of annual revenues (one third of the U.S. economy), and is the world’s fifth-largest economy on a standalone basis.
PennantPark’s core focus is U.S.-based companies, in which it invests between $10.0 and $100.0 million across the capital structure (senior secured loans, subordinated debt, and other types of investments) in companies with $10.0 to $50.0 million of earnings before interest, taxes, depreciation, and amortization (EBITDA).
The BDC’s debt portfolio consisted of 96% variable-rate investments and four-percent fixed-rate investments. PennantPark’s portfolio currently includes 139 different companies and has an average investment size of $8.4 million.
Some of the industries targeted by PennantPark include aerospace and defense, business services, consumer products, financial services, health care, insurance, and telecommunications.
First-Quarter Net Investment Income in Excess of Dividend
For the first quarter of fiscal 2024, ended December 31, 2023, PennantPark announced revenues (investment income) of $34.3 million, up by 14% from $30.0 million in the same prior-year period. (Source: “PennantPark Investment Corporation Announces Financial Results for the Quarter Ended December 31, 2023,” PennantPark Investment Corp., February 7, 2024.)
Its fiscal first-quarter net investment income was $15.7 million, or $0.24 per share, up by 52% from $10.3 million, or $0.16 per share, in the first quarter of fiscal 2023.
During the first quarter of fiscal 2024, PennantPark invested $231.1 million in 12 new and 32 existing portfolio companies at a weighted average yield on debt investments of 11.9%. Its sales and repayments of investments in the first quarter of fiscal 2024 totaled $71.0 million.
In the first quarter of fiscal 2023, the company invested $86.2 million in six new and 29 existing portfolio companies at a weighted average yield on debt investments of 11.2%. Its sales and repayments of investments in the first quarter of fiscal 2023 totaled $30.6 million.
Monthly Distribution of $0.07 Per Share
PennantPark’s earnings stream has been robust, allowing it to provide investors with reliable monthly dividends. On March 4, the company’s board declared a monthly distribution of $0.07 per share of PennantPark stock. (Source: “Dividends and Distributions,” PennantPark Investment Corp., last accessed March 12, 2024.)
As of this writing, that represents a dividend yield of 12.35%.
The Lowdown on PennantPark Investment Corp.
PennantPark Investment Corp. is an outstanding BDC that throws off a lot of cash. And thanks to a tax loophole for BDCs, the company needs to pass along 90% of its taxable income to investors in the form of dividends.
Going forward, the company’s robust earnings stream should help it continue rewarding buy-and-hold investors with high-yield monthly dividends.
