Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

Why Medley Capital Corporation Stock Plunged on Tuesday

By Jordan Wathen - May 9, 2017 at 2:44PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Shareholders are dumping shares following a poor earnings report and a dividend cut.

What happened

Shares of Medley Capital Corporation ( MCC -1.16% ) are trading down by about 15% as of 1:00 p.m. EDT after the company slashed its dividend by 27% and reported a first-quarter loss.

So what

Investors buy business development companies for their beefy dividend yields, so it's no surprise to see shares dive after the dividend was slashed to $0.16, down from $0.22 declared in the prior quarter.

Picture of change sitting on top of $1 bill

Medley Capital's poor underwriting is turning dollar bills into pocket change. Image source: Getty Images.

The company reported operating income of $0.15 per share in the first quarter. Including the effects of capital losses stemming from its portfolio investments, net loss came in at $0.22 per share.

Impairments in its investment portfolio continue to pile up. Medley Capital classified 6.4% and 7.4% of its investments at fair value as a "4" or "5" rating under its investment performance rating system. Last quarter, just 6.9% and 1.4% of its investments at fair value were included in categories "4" or "5." 

At best, these investments are those that are "performing below expectations and for which risk has increased materially since origination," per disclosure in its 10-Q filing. At worst, "[m]ost or all of the debt covenants are out of compliance and payments are substantially delinquent. Some loss of principal is expected." A $13.4 million impairment to just one portfolio company, OmniVere LLC, was enough to generate losses of roughly $0.25 per share during the quarter.

Now what

Medley Capital is a perennial capital incinerator. Over the last 12 months, book value per share dropped from $9.80 per share to $8.94 per share. Dividends have been slashed twice, from $0.30 paid in June 2016 to the $0.16 dividend it declared for payment in June 2017.

This has happened despite management fee waivers designed to better align the interests of shareholders and management and share repurchases that have devoured approximately 2.3% of the company's outstanding shares over the most recent year. Insiders have also purchased millions of shares at prices over $7 in the past 12 months, in what now appears to have been an effort to boost investor confidence.

Shares now trade at about 0.72 times book value, perhaps reflecting investors' fears that there may be more loss content hiding in the portfolio after 12 consecutive quarters of declining book value per share. 

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Medley Capital Corporation Stock Quote
Medley Capital Corporation
MCC
$40.92 (-1.16%) $0.48

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
673%
 
S&P 500 Returns
142%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/30/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.