PNNT - PennantPark: 5% Dividend Hike Switching To Monthly Payouts Fatter Yield

2023-08-13 09:13:26 ET

Summary

• PennantPark just hiked its quarterly cash dividend by 5% and will move to a monthly payout from October.
• The BDC is currently swapping hands at an 11.4% discount to NAV per share. However, NAV has generally been on a downtrend.
• Fiscal 2023 third-quarter core net investment income was unchanged from the second quarter but the Dominion payout drove a huge NII gain.

PennantPark Investment Corporation (PNNT) just hiked its quarterly cash dividend by 5% to $0.21 per share for a 12.2% annualized forward yield. The business development company will also change to a monthly distribution schedule in October, a move that will place it in line with the other BDC ( PFLT ) managed by its Miami-based external advisor PennantPark Investment Advisers. PennantPark's quarterly distributions have been on the move up, buffeted by a Fed funds rate that was hiked ten consecutive times, paused, and then hiked again to a 22-year high of 5.25% to 5.5%. The income is the prize here and PennantPark has seen its quarterly distributions grow at a 20.5% compound annual growth rate since the third distribution of 2020 when the pandemic forced the BDC to cut the distribution by 6 cents per share.

The BDC's quarterly distribution now sits 16.7% above its 2019 level, with the near-term outlook for further raises incredibly positive on the back of a heavily floating rate portfolio that's set to continue riding higher in the current elevated interest rate macroeconomic backdrop. Interest rates are set to stay higher for longer, with the market also currently pricing in a 90% probability that the Fed keeps rates unchanged at its upcoming FOMC meeting on the 20th of September. The majority market consensus is also for less than 100 basis points to the downside a year from now. Hence, the high-interest rate party for BDCs is set to last for at least another year and comes on the back of a resilient US economy with a recession ruled out for 2023 by J.P. Morgan and with 2024 recession expectations also being dialed back to less than a 1 in 5 chance.

Dominion Payout Drives Huge Gains

PennantPark recently reported its fiscal 2023 third-quarter earnings ended June 30 which saw total investment income come in at $45 million , up 92.7% from $23.35 million a year ago. Interest from non-controlled investments grew by 46% from its year-ago comp, with growth during the third quarter majorly driven by a $11.78 million onetime dividend income earned from the BDC's equity investment in Dominion Voting. The voting equipment provider sued Fox News for defamation, with both parties settling for $787.5 million .

Total operating expenses at $22.06 million was driven higher by a $4.87 million incentive fee paid to the external advisor. PennantPark recorded a net investment income of $22.96 million, around $0.35 per share. This was up more than 2x from the year-ago figure to drive a $20.9 million increase in net assets, around $0.32 per share. The BDC's GAAP net asset value per share as of the end of the third quarter came in at $7.72, up around 12 cents sequentially from the second quarter but down from $9.65 in the year-ago period.

PennantPark's NAV trendline, as defined by book value, has not been great. The BDC's NAV has generally trended down from its pre-pandemic levels, with the discount to NAV being a near-perpetual feature of the ticker. PennantPark is currently swapping hands at an 11.4% discount to NAV, with the gap closing in recent weeks on the back of common shares surging from their 2023 lows.

Are Further Dividend Hikes Likely Through 2023?

There has been a raise to the dividends every quarter of 2023 with the move to a monthly payout set to see common shareholders receive their income more frequently. Core NII for the third quarter was $0.22 per share, after excluding $0.13 of onetime dividend income related to the Dominion equity investment. Hence, the BDC is currently paying out a high 95.4% of core NII to its common shareholders. Future growth will be driven by a portfolio that totaled $1.08 billion as of the end of the third quarter. Around $590.5 million of this, or 55%, was comprised of first-lien-secured debt. The BDC also held a $235.8 million preferred and common equity position, around 22% of its portfolio. Critically, the credit portion of its portfolio was 96% floating rate investments, with only one portfolio company on non-accrual status as of the end of the third quarter. This was 1.1% of the portfolio at cost and 0% at fair value.

PennantPark was able to make $326.3 million of investments during the quarter, spread across 11 new and 36 existing portfolio companies and at a weighted average yield on debt investments of 8.7%. However, core NII for the third quarter was unchanged sequentially from the second quarter. Hence, management might err on the side of caution for the upcoming move to monthly payouts. This will likely be done without a raise to what's set to be a $0.07 per share monthly payout. The monthly move will likely spark some shareholder enthusiasm, with a double-digit discount to NAV rendering this as a hold.

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