Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Is Main Street Capital Corporation a Buy Right Now?

Main Street Capital Corporation (NYSE: MAIN  )  has emerged as one of the best players in the BDC industry, outperforming its peers and delivering spectacular returns over time.

But now its wants to grow, and to do so, it's enlisting the help of bankers to sell 4 million new shares at $31.50 each. The announcement led to an immediate 5% decline in the share price.

And though 5% is hardly the difference between good and great valuation, a 5% discount is equal to about three quarters' dividends. Furthermore, Main Street Capital now trades at 1.41 times book value including proceeds from the offering, a price not seen since 2011.

MAIN Price to Book Value Chart

Why Main Street Capital looks cheap right now
Main Street Capital certainly trades well above its peers at 1.4 times book value, but for good reason: Its asset yields are unmatched.

In the lower middle market, where it makes debt and equity investments in the smallest of private companies, it earns impressive 14.7% yields from a portfolio constructed of first-lien debt investments. Its true middle market portfolio yields 7.8%.

Yields in the true middle market have plunged. One BDC, THL Credit (NASDAQ: TCRD  ) , has seen its yields plunge quarter after quarter. Plunging asset yields put its dividend at risk

This hasn't been the case at Main Street Capital, where yield compression has been modest, and thus far, temporary. The company's lower middle market debt portfolio yielded 14.8% in 2011, and 14.2% in 2012, compared to 14.7% at the end of 2013.

Banking on tiny companies
For as long as the lower middle market can be a gold mine for Main Street Capital, its shares should trade well above book value. The lower middle market is less efficient, and multiples are lower. Thus, Main Street Capital not only finances lower-leveraged businesses, it also buys equity stakes at lower multiples than other BDCs pay in the "true" middle market.

The latest presentation says a typical entry multiple is 4.5-5.5 times EBITDA, significantly lower than multiples for larger middle market buyouts. CapitalIQ data places the median middle market buyout at 8x EBITDA, funded with a combination of 61% debt, and 39% equity. It's pretty easy to see a difference in valuation. Bigger companies are pricier, and more highly levered.

When I look at Main Street Capital, I see a portfolio of very inexpensive, private businesses. The debt investments provide current income in the form of a robust dividend yield, but its equity stakes in lower middle market companies are the real kicker.

Main Street typically owns 33% of the equity in its lower middle market portfolio, giving investors huge upside potential as its debt investments are repaid and its lower middle market companies "grow up."

Over long periods of time, I can't help but think a combination of lower entry valuations and higher debt yields should make Main Street Capital a great buy at this price. The 7.8% current dividend yield is especially appetizing.

Are these dividend stocks better than BDCs?
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Read/Post Comments (2) | Recommend This Article (7)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2908890, ~/Articles/ArticleHandler.aspx, 9/2/2015 7:54:31 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Jordan Wathen

"The liabilities are always 100 percent good. It’s the assets you have to worry about." - Charlie Munger

Today's Market

updated Moments ago Sponsored by:
DOW 16,351.38 293.03 1.82%
S&P 500 1,948.86 35.01 1.83%
NASD 4,749.98 113.87 2.46%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/2/2015 4:02 PM
MAIN $27.83 Up +0.11 +0.40%
Main Street Capita… CAPS Rating: ****
TCRD $12.41 Up +0.04 +0.32%
THL Credit, Inc. CAPS Rating: *****