As high-yield dividend stocks go, you can’t get much higher than PennantPark Floating Rate Capital‘s (PFLT 0.36%) more than 11%. That hasn’t made this business development company (BDC) a hit lately, though; its stock has fallen since Nov. 25 while the S&P 500 index inched into positive territory. Let’s look at why the stock has gone nowhere, and evaluate whether this presents a good buying opportunity for investors.
A prime lender
The news that drove down PennantPark’s share price hit the headlines toward the end of November. Specifically, the item in question was the company’s 2024 fiscal fourth-quarter (ended Sept. 30) earnings report.
For the period, the company’s total investment income — basically its revenue, derived from the numerous businesses it has invested in — amounted to $55.5 million. This was both higher than the $49 million-plus of the same quarter the previous year, and the average analyst estimate of $50.8 million.
The picture for profitability wasn’t as pretty. PennantPark’s net investment income was $18 million, or $0.24 per share. However, the double whammy was that this was down (albeit not by much) from fourth-quarter fiscal 2023’s $18.5 million, and well below the average analyst forecast of $0.32.
PennantPark, one of several related financial services entities that includes Pennant Park Investment Corporation, is a BDC. This means that its business is providing financing to middle-market companies that often can’t secure funding from traditional banks or other creditors. Pennant Park chiefly does this through first-lien loans (i.e., credit secured by collateral that has primary position among other financing instruments).
Many of these loans bear floating interest rates, hence the company’s name. As of Sept. 30, nearly $1.75 billion of PennantPark’s $1.98 billion portfolio (spread among 158 businesses) consisted of first-lien credit. The remainder came from other types of loans, and dividend payouts from the enterprises it invests in.
In its fourth-quarter earnings release and analyst conference call, PennantPark didn’t explain deeply why its top line was higher year over year while net investment income slipped.
Within its 10-K annual report filing, it wrote that for its full-fiscal year 2024 the increased size of the portfolio boosted total investment income. As for the bottom line, debt-related interest and expenses rose by 78% from the previous year to almost $68 million. One significant development was a drop in its weighted average yield on debt investments; this fell to 11.5% as of Sept. 30 from 12.6% on the same date in 2023.
The high-yield dividend is paid frequently
Investors who were unimpressed by that quarter might have missed a few juicy details of PennantPark’s results. One that I find especially encouraging is the 21% increase from a year ago in the number (158) of businesses utilizing its services.
Of those 158 businesses, a mere two were recorded as being “non-accrual” (i.e., neither principal nor interest being paid for more than 30 days, or if there is “reasonable doubt” such payments will be made). That only consists of 0.2% of the fair value basis of PennantPark’s portfolio.
As the year-ago tally was three, it’s clear that management has good judgement and picks its borrowers well. In an environment where loans can still reap double-digit interest rates, that’s very good for the fundamentals.
It also helps support that reliably high-yield dividend, which at 11.2% isn’t too far from its year-to-date high. What’s more, PennantPark is one of those rare companies that doles out its distribution not quarterly, not semi-annually, not annually, but monthly. So that payout is generous, and it lands in investors’ pockets every few weeks.
When managed well and effectively, BDCs are an important part of our economy, helping to support the operations of the small and mid-sized enterprises major national lenders might be ignoring. Happily for PennantPark investors, the company knows quite well how to profit from the activity. The market is currently not paying attention to the stock, which is all the more reason to consider buying it at its relatively bargain price now.
Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
