This Value Stock Also Offers a 10% Dividend Yield
A Hidden Dividend-Paying Gem…
There are many reasons why value investing has been one of the most popular investment strategies. One of those reasons that’s of particular importance today is the idea of “margin of safety.” By purchasing equities at prices lower than their intrinsic value, an investor allows some room for error in the value estimation process. And indeed, with the S&P 500 Index, the NASDAQ Composite, and the Dow Jones Industrial Average all surpassing their all-time highs, who can be 100% sure that the current valuations are justified?
That’s why today, I’m going to show you a stock that trades at a significant discount. And the yield is pretty handsome, too.
The stock in question is PennantPark Investment Corp. (NASDAQ:PNNT), a business development company based in New York City. PennantPark focuses on investing in middle-market private businesses in the U.S. The investments can take the form of secured loans, mezzanine debt, and equity.
According to PennantPark’s latest earnings report, the company has a net asset value (NAV) of $9.10 per share. However, note that PNNT stock trades at just $6.91 apiece. So if the company’s portfolio hasn’t deteriorated much since that report, its current share price would represent a more than 20% discount from its NAV. (Source: “PennantPark Investment Corporation Announces Financial Results for the Fourth Quarter and Fiscal Year Ended September 30, 2017,” PennantPark Investment Corp., November 29, 2017.)
Now, you may be thinking that since the market prices the stock at such a big discount, there must be something wrong with the business, right? Well, not really. While PennantPark is not as solid as The Coca-Cola Co (NYSE:KO) or Johnson & Johnson (NYSE:JNJ), it still runs a profitable business.
You see, despite investing in a variety of instruments, the company’s focus is secured lending. As of September 30, 2017, approximately 75% of PennantPark’s portfolio consisted of first-lien and second-lien secured loans. When an investor is a first-lien lender, they will be the first one in line to get paid in the event that the borrower goes through liquidation. Having the majority of its portfolio invested in first-lien and second-lien loans provides an added level of safety to the company’s portfolio. (Source: “PennantPark Investment Corporation,” PennantPark Investment Corp., last accessed January 24, 2018.)
The portfolio is also quite diversified. By the end of the September 2017, PennantPark had investments in 55 companies coming from more than 20 different industries. No single industry represents more than 10% of its portfolio. At the same time, these portfolio companies provide a sizable income to PennantPark. The yield at cost on the company’s debt portfolio is a very impressive 11.5%.
With a solid portfolio and stable cash flows, PennantPark Investment Corp. can pay oversized dividends. Right now, the company has a quarterly distribution rate of $0.18 per share, giving PNNT stock an annual yield of 10.4%.
In a soaring stock market, a value is not easy to find. PennantPark stock’s sizable discount to its NAV, combined with a double-digit yield, could make it an opportunity for yield-seeking investors.