Investors seeking a monthly dividend payout are generally motivated by one of two factors: the slight advantage that monthly compounding offers over quarterly compounding, or the need for unearned income to be disbursed frequently throughout the year. In this article, we'll cover two attractive companies issuing monthly checks to shareholders: EPR Properties (EPR 0.10%) and Main Street Capital Corporation (MAIN 0.23%).
Image source: Getty Images.
A focused REIT
EPR Properties is a real estate investment trust (REIT) that invests primarily in properties related to the entertainment, education, and recreation industries in the U.S. and Canada. The company holds about $3.8 billion in net investment assets, and specializes in triple-net leases, in which tenants hold responsibility for property taxes, insurance, and maintenance along with their lease payments.
EPR pays a monthly dividend offering an impressive current annualized yield of 5.35%. The company has increased its dividend in each of the last six years, with the current year hike equal to just under 6%. EPR's payout ratio, that is, dividends paid divided by net income, has averaged 118% over the last 12 months. As a REIT, EPR must distribute at least 90% of taxable income to shareholders each year, so the more than 100% payout ratio is not atypical within the REIT industry.
On a total return basis, EPR's stock has rewarded shareholders handsomely as of late, gaining nearly 43% over the last 12 months. But it's not necessarily overvalued. The "EPR" ticker trades at a price-to-FFO (i.e., funds from operations, a common measure of REIT cash flow) ratio of 15.6, which is slightly under the current REIT industry average of 17.2.
One characteristic of EPR that investors should understand is its specialization in multiplex cinema leases -- simultaneously a strength and a weakness. These are lucrative, long-term agreements, but the REIT is perhaps too concentrated in one company within this revenue stream.
About 24% of EPR's megaplex cinema theater leases are held by a single tenant, American Multi-Cinema, Inc., (AMC), which is a subsidiary of AMC Entertainment Holdings Inc. (AMC -3.25%). Through the first nine months of 2016, AMC leases represented 18% of total EPR revenue, though it should be noted that this is a 3-percentage-point improvement over the comparable prior-year period.
EPR has worked to decrease its megaplex concentration in recent quarters. It will soon close on the acquisition of the Northstar California Ski Resort, along with a package of water and amusement parks, and family entertainment centers, from CNL Lifestyle Properties, Inc., for approximately $700 million -- most of it in the form of company stock.
Despite its revenue concentration, EPR is a pretty solid choice among monthly dividend payers. Its senior unsecured debt has earned the coveted "investment grade" rating from two major corporate credit ratings agencies, and the company generates healthy profits -- its net income margin for the nine months ended Sept. 30, 2016, exceeded 41%.
An efficient and profitable investment company
As a business development company, or BDC, well-regarded Main Street Capital is registered under the Investment Company Act of 1940 to provide capital to small and mid-sized businesses.
The company offers both debt and equity financing to lower middle market (LMM) and middle market companies. Main Street refers to LMM companies as those with annual revenue between $10 million and $150 million, and middle market entities as those with revenue between $150 million and $1 billion.
As an efficiently run business, the company for the most part avoids hiring external advisors. Rather, its investments are vetted and ultimately managed by internal teams. Main Street is fond of pointing to its industry leading "operating expense to assets" ratio as proof of its effective cost structure. This ratio stood at 1.5% on an annualized basis as of the company's most recently reported quarter.
One of the aspects I really like about "MAIN" is its dual focus on small and midsize corporations. For LMM companies, Main Street often takes an equity stake in addition to buying mezzanine debt when it funds transactions. Investment in middle market companies tends to be more conservative and confined to debt investments, with the interest component typically at LIBOR (London InterBank Offered Rate) plus a reasonable margin.
This strategy is illustrated more specifically in a table from Main Street's most recent earnings release:
Image source: Main Street Capital Q3 2016 8-K earnings filing. Annotations in red by author.
You'll see that for middle market companies, Main Street Capital supplies 98% of its capital in the form of debt. But for LMM companies, the organization allocates nearly a third of its funding as equity, either through direct investment or in the form of warrants for future exercise.
In many instances a LMM funding transaction occurs with a value-added objective. Growth financing, management buyouts, and acquisition capital are a few of the cited use cases in Main Street's latest annual report. Thus, the equity participation component is made with very favorable odds of future appreciation.
From a valuation perspective, there's also an inherent advantage in equity participation in LMM companies, as these smaller enterprises tend to trade at lower EBITDA multiples than private and public middle market companies and, for that matter, publicly traded companies of any size.
This allows Main Street to generate more bang for each investing buck, which is another, if less well understood, example of MAIN's efficiency over BDC competitors.
Main Street Capital currently pays a monthly dividend yielding 6.05%. It's had an enormous run for a BDC over the last five years, providing a total return of 160%. As a consequence the "MAIN" symbol has become pricey, currently selling at a little more than 23 times free cash flow per share -- well above most of its BDC peers. Thus, if you'd like to build a position in Main Street Capital, consider averaging into these shares in 2017.
