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 Pennant Park Investment Corp. (NASDAQ:PNNT), a business development company based in New York City. Pennant Park 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 Pennant Park’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,” Pennant Park 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 Pennant Park 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 Pennant Park’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,” Pennant Park Investment Corp., last accessed January 24, 2018.)
The portfolio is also quite diversified. By the end of the September 2017, Pennant Park 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 Pennant Park. The yield at cost on the company’s debt portfolio is a very impressive 11.5%.
With a solid portfolio and stable cash flows, Pennant Park 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. Pennant Park stock’s sizable discount to its NAV, combined with a double-digit yield, could make it an opportunity for yield-seeking investors.
Dear Reader: There is no magic formula to getting rich. Success in investment vehicles with the best prospects for price appreciation can only be achieved through proper and rigorous research and analysis. We are 100% independent in that we are not affiliated with any bank or brokerage house. Information contained herein, while believed to be correct, is not guaranteed as accurate. Warning: Investing often involves high risks and you can lose a lot of money. Please do not invest with money you cannot afford to lose. The opinions in this content are just that, opinions of the authors. We are a publishing company and the opinions, comments, stories, reports, advertisements and articles we publish are for informational and educational purposes only; nothing herein should be considered personalized investment advice. Before you make any investment, check with your investment professional (advisor). We urge our readers to review the financial statements and prospectus of any company they are interested in. We are not responsible for any damages or losses arising from the use of any information herein. Past performance is not a guarantee of future results. All registered trademarks are the property of their respective owners
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