PFLT: 8.3% Dividend Yield ‘Safe Enough For Your Grandma’ And Positioned For Rising Rates

Summary

  • PFLT continues to rally since my previous article and up almost 10% since March 1, 2018. I am expecting improved dividend coverage for the reason mentioned in this article.
  • PFLT’s portfolio yield continues to rise partially due to being invested in 100% floating rate assets driving higher earnings as shown in my Interest Rate Sensitivity Analysis.
  • Similar to other higher quality BDCs, PFLT’s management is focused on capital preservation and “underwriting as if we’re at the peak of the credit cycle”.
  • Management purchased additional shares at the recent lows and mentioned: “Our growing portfolio, increases in LIBOR, and the doubling of PSSL should provide a strong tailwind to growing our earnings stream”.
  • PFLT is trading under book value with first-lien senior secured investments at floating rates for investors that want solid returns without the typical amount of BDC-related risk.

You can read the full article at the following link:

Recent BDC Performance:

The stock price for PennantPark Floating Rate Capital (PFLT) has continued to rally since my previous article “First-Lien Portfolio Currently Paying A 9% Dividend Yield” discussing reasons to buy including rising portfolio yield and dividend coverage over the coming quarters.

As mentioned in previous articles, most business development company (“BDCs”) have outperformed the S&P 500 since March 1, even before taking into account dividends paid:

 

PFLT insiders were purchasing additional shares near the recent lows:

I am expecting BDCs to continue higher for many reasons, including the recently announced strong Q1 2018 results reported by most BDCs, with higher portfolio yields and management guidance for increased portfolio growth potential in 2018. Also, many BDCs reported higher-than-expected earnings and dividend coverage with increased net interest margins.

GSBD: 9.4% Dividend Yield Supported By First-Lien And Strong Covenants

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Summary

  • 9.4% dividend yield is excellent for a BDC with protective covenants for 90% of the portfolio, 54% is first-lien, and non-accruals decreased to 0.0% due to the restructuring of Bolttech.
  • GSBD has been trading lower, the market is likely expecting an equity offering, as the company was at its targeted leverage and trading at a premium to NAV.
  • Previously, I reduced GSBD’s short-term target price due to lower dividend coverage over the last two quarters and for my revised 2018 projections.

Quick BDC Market Update

As discussed in previous articles, business development companies (“BDCs”) have been pulling back since May 2017. The following chart uses UBS ETRACS Wells Fargo Busn Dev Co ETN (BDCS) as a rough proxy for the average BDC, many of which are near new lows (including GSBD).

Obviously, lower BDC prices have driven higher overall dividend yields with the average BDC currently yielding 10.6% as shown below. However, it should be noted that I’m expecting dividend cuts for a few of the higher yield BDCs as discussed in my recently updated Dividend Coverage Levels report.