THL Credit, Inc.: Now Is the Time to Watch This 12.7% Yielder
Time to Check Out This Ultra-High Yielder
As a conservative income investor, I don’t usually feel the need to watch a particular stock in earnings season. If a company has the ability to consistently raise its dividend—which is what I usually look for my stock picks—chances are that ability is embedded in the nature of its business and investors shouldn’t be kept up at night about one earnings miss or beat.
Still, when it comes to the not-so-perfect ultra-high yielders, quarterly earnings reports could deliver valuable information about the safety of their payouts.
And that’s why I believe it’s time to pay close attention to THL Credit, Inc. (NASDAQ:TCRD), which currently provides a jaw-dropping annual dividend yield of 12.7%.
Now, the reason I call these “not-so-perfect ultra-high yielders” is simple: in today’s market, if a stock is perfect and provides a dividend yield north of 12%, investors would jump on the opportunity. And before long, they would bid up the stock price and lower its yield.
A look at TCRD stock’s dividend history would show why it’s not exactly perfect. In 2016, management reduced the company’s quarterly dividend rate from $0.34 to $0.27 per share. Then, earlier this year, they cut the quarterly payout again to $0.21 per share. (Source: “Historical Dividends,” THL Credit, Inc., last accessed July 26, 2019.)
No one likes dividend cuts. But when a company’s profits cannot cover its payout, it is bound to happen. Last year, THL Credit, Inc.’s net investment income came in at $1.07 per share. Its declared dividends, on the other hand, totaled $1.08 per share. In other words, the company’s profits fell short of its dividend obligation. (Source: “THL Credit Reports Fourth Quarter 2018 Financial Results and Announces Adjustment of Quarterly Dividend to $0.21 Per Share,” THL Credit, Inc., March 6, 2019.)
After the dividend cut, though, things looked better. In the first quarter of 2019, THL Credit, Inc. earned a net investment income of $0.21 per share, which matched its new quarterly dividend rate of $0.21 per share, although the amount did not leave any margin for error. (Source: “THL Credit Reports First Quarter 2019 Financial Results and Declares a Dividend of $0.21 Per Share,” THL Credit, Inc., May 9, 2019.)
Will THL Credit, Inc. Make a Turnaround?
Now, one quarter of dividend coverage is not enough. As I have said plenty of times before, for a company to be worth considering for risk-averse income investors, it needs to demonstrate consistent dividend coverage. And that’s what I’m looking for at TCRD stock.
You see, THL Credit, Inc. is scheduled to report second-quarter financial results on Thursday, August 8 after the market closes. On average, Wall Street expects the company to earn a net investment income of $0.23 per share for the quarter. That means that if the company meets that expectation, it would be able to achieve a coverage ratio of nearly 110% for its $0.21 per share quarterly cash dividend. That would certainly be a welcoming improvement and would put the company on track to deliver consistent dividend coverage. (Source: “THL Credit, Inc. (TCRD),” Yahoo! Finance, last accessed July 26, 2019.)
It should also be noted that management is determined to return cash to investors through the new dividend policy. In the previous earnings conference call, the company’s Chief Executive Officer Christopher Flynn said, “We set the $0.21 dividend at a level where we feel very confident and we try to rebuild credibility with the street that we can achieve this.” (Source: “THL Credit, Inc. (TCRD) CEO Christopher Flynn on Q1 2019 Results – Earnings Call Transcript,” THL Credit, Inc., May 10, 2019.)
However you look at it, THL Credit is indeed trying to make a turnaround. As a business development company that provides financing solutions to middle-market businesses, THL Credit has is putting a lot more emphasis on senior secured lending. At the end of 2014, first lien loans represented only 50% of the company’s portfolio.
By the end of the first quarter of 2019, the share of first-lien loans in TCRD’s portfolio has risen to 67%. By definition, a first-lien lender will be the first in line to get paid in the event of borrower liquidation. Having a higher portion of first-lien senior secured loans can help improve the credit risk profile of the company’s portfolio. (Source: “Earnings Presentation,” THL Credit, Inc., last accessed July 26, 2019.)
The Bottom Line on THL Credit, Inc.
Now, TCRD stock isn’t perfect. The reason is what I mentioned before: while the company offers a staggering yield of 12.7%, it has yet to demonstrate consistent distribution coverage.
However, recent developments suggest that the turnaround plan could start bearing fruit. If THL Credit, Inc. can meet Wall Street analysts’ estimates for net investment income in the second quarter, it will likely give a solid boost to investor confidence. For now, I wouldn’t mind adding TCRD stock to my watchlist and follow it very closely.