BDC Update: Main Street Capital

Confidence Confirmed

April 16, 2024

Right Direction

Since we last wrote on February 21, 2024 (see below), Main Street Capital (MAIN) there have been two notable developments at everyone's favorite BDC. First, MAIN's stock price has reached new heights. The latest record is $47.82, up 3.8% from $46.04 two months ago. The BDC has traded at a premium of as much as 64% its NAV Per Share (NAVPS) at the end of 2023.

Impressive

Today, the BDC announced some preliminary results for the IQ 2024 - as MAIN does every quarter in advance of its full fledged disclosures. The bottom line? Recurring earnings - whether GAAP approved Net Investment Income Per Share (NIIPS) or non-GAAP "Distributable Net Investment Income Per Share" (DNIIPS) appear to be exceeding the numbers of a year ago and are very close to the record-breaking performance of 2023. Moreover - for the seventh quarter in a row - MAIN can boast of an increase in its NAVPS.

Caution

We don't want to get too excited because there's a lot we don't know yet and even the NAVPS increase has - probably - more to do with holding on to net investment income than any material improvement in asset quality. For all we know the level of underperforming and non-performing assets might have increased slightly from the IVQ 2023. We'll have to wait till May to know for sure.

In-Line

However, we're glad to report that the BDC's NIIPS in the IQ 2024 seems to be in line with our projections for the year. We had estimated recurring earnings might drop off slightly in 2024 to $4.1000 per share from $4.1400 in 2023. That goal remains in sight and if the Fed does not prune interest rates this year materially as some are predicting, earnings might head even higher. Our projection for a 2024 payout of $3.8300 remains untrammeled as well.

Valuation

Recommendation

February 21, 2024

Record

We're writing to report that Main Street Capital (MAIN) has just announced its distributions for the IIQ 2024 - and they're impressive. Admittedly - and as expected - the "regular" monthly distribution is unchanged at $0.2400 per share. However, the BDC also announced a $0.3000 per share "special" for the second quarter. We scrolled back some way through MAIN's dividend history and could not find a higher quarterly "special". The last one had an ex-date of December 2023 and was for $0.2750 per share.

Summing Up

For all of 2023, MAIN paid out $3.6950 per share - slightly less than the $3.7200 we presumed back on October 17, 2023, when we last wrote an update - scroll down to see. Nonetheless, that's a remarkable increase over the $2.9450 total for 2022. Since 2021 - the last year of low rates and tight spreads when MAIN paid out $2.5750, MAIN has upped its annual distributions by 44%. Can there be any doubt about why the BDC is so popular with investors? Its stock price reached a new record high of $46.04 on January 31, 2024, and opened today at $44.88. The current price to the 2023 dividend is a multiple of 12.1x and at the 52-week high, the multiple is 12.5x.

$64,000 Question

MAIN's shareholders will be wondering what sort of total payout to expect in 2024, especially now that management has already opened the kimono for the first 6 months of the year. The total so far is $1.7400 per share - 14% higher than the same time last year. We had a look at our projections and made a few changes. We're now projecting MAIN will pay out $3.8300 per share this year, thanks to a slight upcoming increase in the monthly dividend and two more "specials". We've extended the dividend projections through 2028 to reach $3.9300 per share.

Assumed

We'll be the first to admit these projections involve a good deal of guesswork. A key assumption is that MAIN continues to grow its net book value per share, which will offset some of the loss of earnings that will occur from the impact of lower interest rates. Yet another assumption - beginning in 2025 - is that the distribution includes an increasing amount of net realized gains as the BDC harvests some of the $1bn invested in the equity of hundreds of lower middle market companies. Still, we're only projecting a 6% increase in the annual payout between 2023 and 2028 - hardly an outlandish estimate given MAIN's track record and business strategy of being both lender and equity owner. Some long-time shareholders of the BDC may believe we've set the dividend bar too low...

Valuation

Recommendation

October 17, 2023

Latest

As we just reviewed at our sister publication the BDC Reporter, Main Street (MAIN) has just offered up preliminary metrics for the IIIQ 2023. In a nutshell, the lower-than-expected earnings and robust increase in net asset value per share (NAVPS) are intriguing but raise as many questions as answers. Nor did we learn anything about the BDC's last "special" dividend of 2023. Management, though, hinted heavily that we might see an increase over the last "special" announced of $0.2750 per share. We're expecting $0.3000 will be the number.

Payout Changed

If we add $0.3000 to all MAIN's dividends paid or announced this year, the full-year number should come to $3.7200. That's marginally higher than the $3.6000 we have been projecting since our latest update in January. We've changed the Expected Return Table accordingly for 2023 but kept the annual payout 2024-2027 at $3.7900.

Earnings

Our estimate is based mostly on our long-term Net Investment Income Per Share (NIIPS) projections, which we've spelled out for the first time. Taken into account - based on MAIN's most recent 10-Q filing - is the likely loss of earnings from the (3%) reduction in the Fed Funds rate which we're expecting to occur over 2025-2027. (2024 is looking like the year of peak earnings from this vantage point). Offsetting the lower profits from a reduction in the base rate are higher EPS from MAIN leveraging itself up to its target level which will increase assets under management and income. (We've no provision for any net realized gains along the way - historically a staple of MAIN's earnings - but those are not conceivable).

NAVPS

Over the past 5 years, MAIN has managed to increase its NAVPS by 16%. For our part, we're projecting this key metric will move up 10% from the level in 2022. At the moment, with MAIN boasting 5 consecutive quarters of NAVPS growth, we seem to be on the right track - albeit after just 3 quarters of the 20 involved in our 5-year outlook. Given this NAVPS growth - the holy grail for the BDC sector and which only a handful of players can point to - we continue to use a multiple of 15.0x the 2027 dividend to set a terminal price. This year MAIN has traded up to 13.5x its total projected payout, suggesting we're on the right track.

Valuation

Investment Recommendation

January 17, 2023

Higher

First came Saratoga Investment (SAR) boasting much higher earnings than anticipated. Now, Main Street Capital (MAIN) has published preliminary results for the IVQ 2022 - discussed in the BDC Reporter - which included a big jump in earnings as well. MAIN's Net Investment Income Per Share (NIIPS) increased 18% over the prior period to $0.98 in the final quarter of the year. What's more, Net Asset Value Per Share - under pressure across the BDC sector in most of 2022 - seems to have sharply increased both this quarter and YTD.

Revised

MAIN's official earnings release is some way away. Still, we're increasing our 2023 dividend projection due to this increasing level of profitability. We're not alone in being more optimistic. The analyst consensus for 2023 NIIPS has jumped from $3.17 to $3.61 in just 90 days - a 14% increase. Even that projection seems low and does not reflect the latest disclosure.

Valuation

October 12, 2022

All-Around

With BDC prices at close to their lowest levels since the flash recession of March 2020, there are buying opportunities for long-term investors on every corner. With so many 100% plus returns (over a 5-year period) to choose from, we plumped for Main Street Capital (MAIN). The mostly lower middle market-focused BDC did not offer the highest return or the best yield. However, it's not every day that this investor favorite trades at such a low price, and we just couldn't stay away.

Buy, Buy, Buy

We acquired MAIN for $32.37 for our Best Ideas Portfolio on Monday, October 10, 2022. The stock was trading - as the chart below shows - at a level not reached since early 2021, and (31%) below its 52-week high of $47.13. (Admittedly, though, MAIN was still 27% above its net book value per share price).

Great Expectations

Aggressive

Admittedly, we are projecting that MAIN's total payout will increase to $3.3040 by 2026. We would point, though, to the analyst consensus for EPS of $3.1700 in 2023 already. In any case, MAIN's distributions historically have been derived from a mixture of recurring income and net realized gains. We're expecting that by 2026, the BDC will be back to harvesting some of its many equity stakes in LMM companies as they've done for years.

Aiming High

The Target Price is $58.42 on the sanguine assumption that the market down the road will return to giving MAIN a huge multiple of 17.7x its distribution. That would be a new 52-week high as MAIN has never traded over $47.13. On the other hand, we are budgeting for higher earnings as well.

Reasonable

To offer a more "conservative" case, we assumed EPS would level out at the $3.1720 we have projected for 2024 through 2026. That's in line with the analyst consensus for 2023 and does not assume any contribution from realized gains. We also reduced the terminal multiple to 15.0x, bringing the Target Price to $47.58, in line with prior highs. This causes the "total return" to drop to 95% over 5 years or 19% per annum. That's not a world-beating return but probably twice or three times what long-term stock returns look like.

Just A Tool

In any case, we only use the Expected Return Table as a rough approximator of what one could earn over a half decade, given there are so many assumptions that go into this projection stew. However, we would regard either result as a clear positive and would be glad we seized the opportunity to invest in one of the oldest LMM BDCs and the one with the biggest portfolio in this segment and the lowest leverage.

Short Term Pain

We do not doubt that both MAIN's upper middle market loan book and its lower middle market loans and equity stakes will take a hit in a recession. The BDC's balance sheet, though, is strong with both SBA and institutionally placed fixed-rate unsecured notes. This will allow MAIN to recover quickly, and without much drama, and get back to making and harvesting equity gains across a wide range of companies by 2026-2027.

Much Improved

Thanks to the recent sharp price drop, MAIN's historical 5-year total return has been only 23%, according to Seeking Alpha. 5 years from now, we could earn 4x-5x as much. For us, this was a no-brainer. As always the only hesitation is that - thanks to investor nervousness - we could yet buy MAIN at a lower price in the months ahead. As noted earlier, though, the BDC is rarely available at this price level, so we grabbed for the brass ring.

August 8, 2022

Higher

The IIQ 2022 results are in for Main Street Capital (MAIN) and we're compelled to increase our projections for total distributions in 2022 and 2023. That's because the BDC fired on almost all cylinders where earnings and payouts were concerned through the first half of the year. What's more, the prospects for the second half of the year look even better, even if NAV Per Share continues to drop. There's a chance that may not happen if the recent rally in the debt markets continues, notwithstanding a possible recession not very far away.

Running Ahead

We had been projecting MAIN would pay out $2.7000 in 2022 in both regular and quarterly "specials". In 2021, the BDC paid out $2.5750 in this way. However, MAIN has been outperforming and has already paid or announced $2.7450 in distributions this year. Another $0.1000 special will be coming shortly for the IIIQ 2022 and we're assuming at least another $0.1000 in the final quarter, for a total of $2.9450. (That final payout could be higher and bring the 2022 number to $3 a share or above).

Step Up

In 2023, because of ever-higher interest rates pushing up income, we're assuming the regular monthly distribution of $0.2200 will average $0.2300, or $2.7600. Add to that $0.3500 in "specials" and you've got our new projection of $3.1100.

Untouched

For the moment we've not finagled with our projections years 3-5, with the final distribution in 2026 set at $3.3004. Also, we're not messing with the huge 17.7x terminal price to dividend multiple that causes the Target Price for MAIN to be $58.42. Admittedly, both the dividend increase and the multiple are high - probably the highest out there, but the numbers are based both on historical patterns and underlying fundamentals.

On Everyone's Dance Card

Sadly, MAIN is hugely popular and the stock has shot up 30% since falling to a 2022 low in mid June. Despite our aggressive long term targets for the dividend and multiple, the total return over 5 years comes to just 67% or 13% per annum. Much of that should come from an assumed 31% price appreciation.

Not Enough. Right Now

That's too low a return to make MAIN an interesting investment right now. We remember, though, that investors can be fickle. In a few weeks during the pandemic, the stock dropped (69%). Then there was a longer slump more recently - between November 2011 and that low in mid-June, which took MAIN down by (24%). Who's to say if investors don't change their minds again?