2023-05-30 03:11:03 ET
Summary
- PennantPark Floating Rate declared a monthly dividend payout that was a 2.5% increase from the prior payout.
- The new payout represents an 11.5% annualized forward yield.
- It also formed a 90.4% payout ratio on a quarterly basis against the BDC's NII for its fiscal 2023 second quarter.
The current macroeconomic environment has made income investing materially more difficult. Income investors now find themselves not only besieged by a Fed funds rate that has been hiked to its highest level since 2008, but also by the reverberations of the March regional banking crisis, and the haunting specter of a recession as inflation remains elevated. Miami Beach-based PennantPark Floating Rate ( PFLT ) has performed well in the current disruptive environment with commons up 8.7% over the last year on a total return basis on the back of a double-digit yield whose monthly payouts that have been placed on an upward ramp after 8 years of stability, albeit, stagnation at $0.0950 per share.
PennantPark last declared a monthly dividend payout of $0.1025 per share , a 2.5% increase from the prior payout and an 11.5% annualized forward yield. The BDC provides first lien debt to middle-market US companies and held a portfolio worth $ 1.16 billion at fair value as of the end of its fiscal 2023 second quarter ending March 31, 2023. This was spread across 130 portfolio companies for a roughly $9 million average investment size and a weighted average yield on debt investments of 11.8%. Net assets as of the end of the second quarter were $554.7 million, up around $34.7 million from $520 million in the year-ago quarter.
PennantPark Floating Rate Capital 10-Q
However, GAAP NAV per share at $11.15 was down by 11.7%, around $1.47, from $12.62 in the year-ago comp. NAV per share was also down 1.3% sequentially from the first quarter. To be clear, total returns are fundamentally driven by two components: the dividend and the price of the commons. The latter tracks NAV per share and reflects a range of factors from capital raising activities, undistributed net investment income, and the fair value of debt investments.
The Discount To NAV And Dual Beats
Nonaccruals are a huge driver of NAV disruption and PennantPark had four nonaccrual loans which represented 0.4% of its portfolio at fair market value and 1.6% at cost. Nonaccruals included Lucky Bucks, a slot machine operator that's exploring filing for bankruptcy, and Output Services Group, a billing and marketing firm that filed for Chapter 11 bankruptcy late last year. However, the BDC is expected to earn around $4 million from its equity ownership in Dominion Voting which settled a lawsuit with Fox News for $787 million post-period end.
NAV has actually been on an uptrend over the last few years as reflected by the book value trendline. However, most of these gains have been driven by the issuance of new shares for investment capital. PennantPark is an externally managed BDC that pays out an annual rate equal to 1% of average adjusted gross assets to its external advisor PennantPark Investment Advisers. NAV per share is down 8.25% over the last 3 years and has fallen by 19.3% over the last half-decade.
Whilst the BDC currently swaps hands at $10.75, a roughly $0.40 discount to NAV per share, this discount holds the possibility of moving to a premium assuming the downward trendline of NAV per share continues. The BDC has had to lean more toward selling new shares to fund its new investments against the marked rise in the Fed funds rate. Hence, we could see this discount move to a premium if NAV per share continues to decline as the stock price roughly remains at its current level.
Should You Buy The 11.5% Yield?
Capital preservation should form a key focus for income investing as yield forms just one of the components of total returns. PennantPark saw total investment income come in at $34.55 million , a 40.2% year-over-year increase and a beat by $2.26 million on consensus estimates. Net investment income was $16.7 million, up 46.5% from $11.4 million in the year-ago comp. Core net investment income per share at $0.34 beat consensus estimates by $0.03 and meant a 90.4% payout ratio against the three-month aggregate of the last declared dividend payout.
Hence, the dividend is safe, especially against a debt portfolio that is 100% floating rate and concentrated on senior secured first lien loans. PennantPark's 11.8% weighted average yield to maturity as of the end of the second quarter was a 500 basis points increase from the prior quarter and was up from a 7.5% yield in the year-ago comp. This yield is likely set to come in above 12% in the third quarter. However, I'm not buying at the current level on the back of NAV per share still in decline. This would have to stabilize first or future total returns would be stunted against a rise in nonaccrual loans if the US falls into a recession.
For further details see:
PennantPark Floating Rate Capital: An 11.5% Yield Paid Monthly And At A Small Discount