Main Street Capital Corporation (NYSE:MAIN) is one of Wall Street's favorite business development companies. As an investor in the debt and equity of companies too small to list on a stock exchange, it currently trades for 1.5 times tangible book value.
Despite its high valuation, Main Street Capital continues to reward investors with outsized dividend growth and appreciation. Here are five things I found most interesting from its latest earnings report:
1. Credit statistics are still excellent
This wasn't a quarter with tons of activity, but even still, Main Street Capital continues to write quality loans in its lower middle market portfolio. This quarter, Main Street Capital revealed that its median lower middle market company was levered at only 2.3 times EBITDA, or earnings before interest, taxes, depreciation, and amortization.
For reference, the largest BDC, Ares Capital (NASDAQ:ARCC), reported an average credit statistic of 4.7 times EBITDA.
2. Favorable tax treatment
This chart really shows the quality of Main Street Capital's dividend:
What's important here isn't the growing amount (since per-share growth is more important), but the fact that 80% of dividends to date qualify for long-term capital gains tax treatment. Thus, investors will pay only 0-23.8% on 80% of their dividends compared to much higher rates at personal income tax rates.
3. Yields are rockin'
So, Main Street Capital's weighted average yield on its lower middle market portfolio did drop to 14.9% from 15.4% in the prior quarter, but the fact is that 14.9% returns on debt investments are still very, very good.
It's only natural that this rate would come down. There's more competition for a high-yielding deal. Not to mention, you'd have to think your average company would die to refinance into a lower interest loan if they were paying rates that look more like credit card interest rates. Main Street Capital is still writing the highest-yielding senior loans in the sector while reporting the lowest EBITDA leverage in its portfolio companies.
4. It's buying back its notes
Hidden deep in the company's earnings report is something I find very interesting, especially for income investors. Earlier this year, Main Street Capital sold "baby bonds" to the public at a price of $25 per share. This quarter, Main Street Capital repurchased roughly $1.1 million of its notes at below par value.
Obviously, Main Street Capital finds its own notes attractive at their current yield and price below par. It seems to indicate that Main Street Capital is happy to buy them back quietly, which may be a signal that investors might want to take a second look at its publicly traded baby bonds.
5. Dividends are getting a lift
With $1.13 per share in spillover income, Main Street Capital has decided to push up its monthly dividend to $0.165 per share from $0.15 per share starting in the first quarter of 2014. Management has every incentive to make shareholder-friendly dividend announcements. Not only is Main Street Capital required by law to distribute 90% of income to shareholders, managers and directors own more than $75 million of the common stock, or roughly 7% of shares outstanding.