Main Street Capital (NYSE:MAIN) continues to lead its industry for long-term performance. And the business development company's record of excellent performance and a market-beating dividend should carry into 2015.
Here are five reasons why.
1. It continues to lead on efficiency
As I see it, nothing lends more to a management team's credibility than cost containment. Main Street Capital has been a lean and mean operator for some time, sending a greater percentage of revenue into pre-tax profits than its peers throughout its history.
In the 12 months leading up to the third calendar-year quarter of 2014, Main Street Capital's operating expenses came to just over 1.5% of its balance sheet assets. Peers frequently spend 3% or more of assets -- that's twice as much -- on operating costs, excluding interest.
Efficiency alone gives Main Street Capital a massive edge. It could give up more money than the average BDC to investment losses and still deliver better returns due to its superior ability to minimize costs.
2. It has cash to deploy
Business development companies like Main Street Capital make their money by lending to junk-rated and unrated businesses. In the last quarter of 2014, the junk and unrated debt markets started to fall, and yields rose significantly.
Debt in the most speculative companies now yields 9.75% more than comparably dated U.S. Treasuries, compared to a 6.5% spread in summer 2014. Capital put to work today earns more than it has in quite some time.
As spreads widened, Main Street Capital secured long-term debt financing with a bond offering of $175 million, giving it the firepower to make investments at higher interest rates.
3. Insiders own a substantial share
Main Street Capital insiders are aligned with investors. In fact, its CEO makes more from the company's robust dividend on the shares he owns than he does from his salary.
Insider ownership has the power to govern corporate behavior. While many BDCs are managed by people who have more to gain from compensation than from stock performance, the fact that Main Street Capital's insiders own a massive chunk of the company (roughly 6% of all shares) forces management to think of that cash as if it were their own -- because it is.
4. Its asset manager is on fire
Main Street Capital is one of a handful of internally managed BDCs, meaning it pays its managers a salary directly from the company. Most BDCs are externally managed by an asset management company, which takes a percentage of assets and quarterly returns. This arrangement allows Main Street Capital to lead on efficiency, but it also presents another benefit: The company has a growing asset-management company on its balance sheet.
Main Street Capital owns MSC Adviser, which earns a fee stream for managing another private BDC on favorable terms. In recent quarters, the asset management business has exploded: Assets now top $400 million, or roughly one-fourth of Main Street Capital's asset base.
Over time, the asset management business's growth will allow Main Street Capital to increase earnings without taking credit risk. From the company's latest conference call, we learned that asset management business should continue to grow for a long time to come, as a second managed fund might be in the works for 2015.
5. It's selling at one of its lowest premiums to NAV
After a rout in the broad industry, Main Street Capital now trades at one of its lowest valuation multiples in recent memory. Shares trade at just under 1.4 times net asset value. At this time last year, shares traded for nearly two times their NAV.
The declining valuation partly results from a lower share price and a rising per-share NAV. At 1.4 times net asset value and about 12 times earnings, Main Street Capital appears to be a compelling, high-yield bargain in the BDC industry. Recognize Main Street Capital for what it is: an opportunity to buy an above-average company at an average-company price.