How Main Street Capital Is Busting the BDC Trend

Main Street Capital continues to improve as other BDCs can't cope with compressed investment yields.

Jan 7, 2014 at 11:56AM

Main Street Capital (NYSE:MAIN) stands alone as a high-quality operator. Last week, the company announced that it expects to beat its November guidance for the fourth quarter.

This, of course, comes after larger rivals have found the competitive landscape more difficult. Last month, Fifth Street Finance (NASDAQ:FSC) cut its dividend. Prospect Capital (NASDAQ:PSEC) failed to earn its dividend in the last quarter. But Main Street Capital, being a much smaller BDC with an internally managed structure, is not only holding steady, but improving quarter after quarter.

The company reported it expects to beat earlier fourth-quarter guidance, and increase its dividend to more than $2.50 per share, per year, starting in 2014.

What makes Main Street better than other BDCs
Lending is a competitive business. There aren't many ways -- or any, really -- to have a strong competitive advantage. Money is money. Lenders are lenders.

But one advantage Main Street does have is that it's small. Therefore, it can focus on lower middle-market companies -- companies with annual earnings in the single million dollar range per year. It's here in the lower middle market where Main Street Capital gets the most advantageous terms.

Main Street Capital's lower middle market loan portfolio had an average weighted yield of 14.9% as of the last quarter. Yields have compressed recently in the true middle market, with lenders getting as little as 7%-8% on senior debt. For Main Street Capital to earn 14.9% on its lower middle-market loans shows that going smaller is paying off. Main Street Capital invests in much smaller companies than Fifth Street and Prospect Capital. 

Naturally, Main Street Capital's improved guidance comes with the announcement of new lower middle-market investments worth more than $60 million. Although, it's worth noting that two other lower middle-market debt investments were moved to "non-accrual," a move that indicates Main Street Capital may write down the debt as it fails to collect on its investment.

The company also announced new middle-market investments worth $75 million, as well as $43.2 million of new investments in its private loan portfolio.

Recent good news is great for Main Street Capital shareholders. The stock is up more than 5% on a bullish outlook for 2014, though with its growing appetite for new investments, I wouldn't be surprised if the company uses its premium to book value to raise new funds with a secondary offering. The company currently trades at 1.7 times tangible book value, one of the highest valuations in the business development company industry. 

High yields can make you rich
Dividend stocks can make you rich. It's as simple as that. While they don't garner the notoriety of high-flying growth stocks, they're also less likely to crash and burn. And over the long term, the compounding effect of the quarterly payouts, as well as their growth, adds up faster than most investors imagine. With this in mind, our analysts sat down to identify the absolute best of the best when it comes to rock-solid dividend stocks, drawing up a list in this free report of nine that fit the bill. To discover the identities of these companies before the rest of the market catches on, you can download this valuable free report by simply clicking here now.

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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