The 11% Yielder I’m Still Holding

Dear Rich Lifer,

Even as the jobless numbers continue to worsen … much of the U.S. economy continues to sputter … and a possible second wave of COVID could hit at any time … the stock market continues to look far out to the horizon with the utmost optimism.

Do I regret selling many of the shares I bought during the March panic?

No.

In fact, I continue to hedge further … selling a fresh round of covered calls against my SLV position just this past Friday just as one recent example.

At the same time, I have also told you why I remain bullish on certain individual companies like Nokia (NOK).

And today I’ll tell you about another investment that I picked up during the big dip and continue holding for three big reasons:

  1. It pays monthly dividends worth a double-digit annual yield.
  2. It is still trading far closer to its March 2009 low – yes, I said March 2009 — than its pre-COVID highs.
  3. Management is smart, conservative, and well-positioned to take advantage of what’s happening right now.

Let’s start with some perspective by way of a chart …

Covid chart

As you can see, the stock was cruising along pretty nicely before the COVID outbreak.

Then, it just dropped off a cliff.

And while it has certainly bounced nicely, it could still jump anywhere from 30% to 50% just to get back to previous levels.

Also note the massive volume spikes during the biggest March down days, which is when I bought in.

At that time, several high-yield funds were experiencing massive outflows and it’s possible that was leading to forced selling of this name.

Of course, many investors continue to worry about its underlying business as well.

Why?

 

The One Stock I’ll DEFINITELY Hold Onto

The company I’m talking about is Main Street Capital (MAIN) and it’s a business development company (BDC) that specializes in funding small- to mid-sized businesses.

Congress created BDCs in 1980 through an amendment to the original 1940 Act mentioned above.

To qualify as a BDC, a company like MAIN must:

  1. Invest in developing companies and firms that are financially distressed, with at least 70% of the assets in companies worth less than $250 million.
  2. Provide managerial guidance to companies it invests in.
  3. Have less debt than total equity.
  4. Own a diversified portfolio with no individual investment comprising more than 25% of total holdings.
  5. Maintain enough liquidity to deal with unanticipated events.
  6. And avoid conflicts of interest, such as investing in companies that are owned by people affiliated with the BDC.

Best of all, to be treated as regulated investment companies, BDCs must pay out at least 90% of their income to shareholders.

In doing so, they avoid corporate taxation like Real Estate Investment Trusts (REITs).

This is why MAIN typically pays out very nice dividends. Moreover, it does so on a MONTHLY basis.

Am I worried about a possible cut going forward?

Sure. In fact, the company has already decided to suspend its semiannual supplemental dividends indefinitely.

At the same time, management has remained committed to the regular monthly payments so far.

I already received a $0.205-per-share payment in April and management has declared the same amounts for May and June.

Those dividends actually represent a 2.5% increase over what was paid during the same months last year, too.

And if we merely assume they continue, my personal annual yield is 11.65% based on my purchase price of $21.12.

That’s on top of the 27% open gain I’m sitting on.

Positive Earnings Outlook On MAIN

Meanwhile, here’s what management just said during their May 7th earnings call …

We completed lower middle market investments of $66 million in the quarter, including investments in two new companies and as of today mainly due to the impact of COVID-19, I would characterize our lower market investment pipeline is below average. Despite the impact of COVID-19, we continue to be very active in our lower middle market strategy as evidenced by our recent announcement of our $49 million investment in Pearl Meyer in late April. We also have several new investment opportunities in the pipeline and expect to continue to execute on new investments in the near-term. More importantly, based upon our historical experiences over the last two decades as the industry leading partner for lower middle market companies and their management teams, we expect that our very unique debt and equity investment offering combined with our ability to be a long-term to permanent partner to these companies will result in a significant increase in our lower middle market opportunities as the economy begins to recover.

“Given the current environment, we continue to focus on maintaining a disciplined and selective approach to new investment opportunities and we remain confident in our ability to originate new investments, consistent with our historical investment profile. During the first quarter, we continued the successful focus of our non-lower middle market investment portfolio growth on our private loan portfolio resulting in this portfolio growing modestly on a net basis in the quarter, but our middle market portfolio decreased by over $30 million. As of today, I’ll characterize our private loan investment pipeline as slightly below average but growing, given the reduction in the number of competitors with the liquidity and access to capital necessary to continue to be active in the current market. When looking at the performance of our investment portfolio during the quarter and specifically our lower middle market portfolio, we are pleased with the vast majority of these companies who were either deemed essential or critical or were able to maintain full operating capacity on a remote work arrangement basis.

“As a result, these companies have been able to maintain a significant level of operations despite the various stay-at-home and shelter-in-place mandates, helping them navigate this difficult time period. And in closing, as a testament to the positive use, our officer and director group continues to have regarding the strength of the Main Street platform. This group has continued to be regular purchaser of our shares, investing approximately $1.1 million during the first quarter, specifically including significant purchases by the executive and senior management team and our board during March when our stock price experienced the most significant negative impacts from COVID-19.

“On a collective basis, our director and officer group owns Main Street shares valued at approximately $68 million at quarter end or over $80 million today.”

In a nutshell, Main Street is managing its portfolio well and conservatively.

Many of the underlying businesses it invests in have continued to operate at a reasonable capacity.

It is finding new opportunities as this crisis plays out. And its managers have a serious ownership stake on the line.

When I consider all of that, plus the ongoing dividends and the upside potential that remains, Main Street Capital is another individual stock that I don’t mind holding despite my broad market reservations.

To a richer life,

Nilus Mattive

Nilus Mattive

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Nilus Mattive

Nilus is the editor for the daily e-letter The Rich Life Roadmap and a Paradigm Press analyst.

Nilus began his professional career at Jono Steinberg’s Individual Investor Group, where he published his original research through a regular investment column. Later, he worked for a private equity business and spent five years editing Standard and Poor’s...

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