Thread Rating:
  • 0 Vote(s) - 0 Average
  • 1
  • 2
  • 3
  • 4
  • 5
MAIN
#1
Ive been watching and keep an eye on BDCs for a while, and finally decided to pull the trigger last week after MAIN announced a dividend increase. I had been a bit nervous about it as their concentration was only in the southern US states and I did not recognize any of the invested companies' names. But I guess that is the name of the game - they invest and provide capital to small/micro companies. But I took comfort in BDC_Buzz's analysis that it was the most conservative BDC out there.

Co-incidentally, MAIN is now a Dividend Challenger in Dave Fish's latest CCC list (the Feb 2015 edition) with a 5-yr streak. The 1, 3, and 5 years dividend growth rates are: 7.3%, 8.5%, and 5.9% respectively. Chowder rule is 12.7.

Looking forward to the juicy 6.8% yields going forward.
Reply
#2
(03-03-2015, 03:11 PM)Roadmap2Retire Wrote: Ive been watching and keep an eye on BDCs for a while, and finally decided to pull the trigger last week after MAIN announced a dividend increase. I had been a bit nervous about it as their concentration was only in the southern US states and I did not recognize any of the invested companies' names. But I guess that is the name of the game - they invest and provide capital to small/micro companies. But I took comfort in BDC_Buzz's analysis that it was the most conservative BDC out there.

Co-incidentally, MAIN is now a Dividend Challenger in Dave Fish's latest CCC list (the Feb 2015 edition) with a 5-yr streak. The 1, 3, and 5 years dividend growth rates are: 7.3%, 8.5%, and 5.9% respectively. Chowder rule is 12.7.

Looking forward to the juicy 6.8% yields going forward.

I have MAIN in my portfolio and am torn between buying more or just holding onto what I got. I like all the stuff that you said, but there's also the issue of MAIN having a negative operating cash flow and a payout ratio of 110%. I only did a cursory glance just a few minutes ago, so you probably know more about the current situation than I do.
Reply
#3
You raise a great point, Joey. I took some comfort in the fact that the negative cash flow seems to be the norm in most BDCs - probably just the way the companies are structured and operated...since their main focus is investing - their cash flow from investing puts them in that section. I realize that BDCs have to meet certain criteria like REITs do (such as distribute 90% of their income in case of REITs). I am not yet clear on what the official rule of law for BDCs is....now that you raise that question...I will be spending some time reading up and research more (esp now that I have some skin in the game).

If you or others have/come across more info, please share.
Reply
#4
(03-07-2015, 08:56 PM)Roadmap2Retire Wrote: You raise a great point, Joey. I took some comfort in the fact that the negative cash flow seems to be the norm in most BDCs - probably just the way the companies are structured and operated...since their main focus is investing - their cash flow from investing puts them in that section. I realize that BDCs have to meet certain criteria like REITs do (such as distribute 90% of their income in case of REITs). I am not yet clear on what the official rule of law for BDCs is....now that you raise that question...I will be spending some time reading up and research more (esp now that I have some skin in the game).

If you or others have/come across more info, please share.

I am retired and invest for income, so I own several BDCs for the income. I do not own them for capital growth. If I were decades away from retiring I would be very hesitant to own a BDC. They do not have a long term track record, and they do not supply products that we cannot get along without, unlike mighty MO or GIS or PG or CL or PEP.

They lend money to small and medium sized companies, some listed, mostly unlisted, and a few lend to venture capital startups that are late in the venture capital cycle. They can also invest in a company's equity. Their lending is some combination of first lien senior debt, 2nd lien senior debt, subordinated debt, and a few invest in CLOs. They are limited to a maximum of 30% investment in non-qualified securities such as CLOs.

Their capital is a combination of equity and debt. The most debt they can have is the value of their equity, but in practice they invariably have less debt than equity. Some qualify to borrow from the SBA at low interest rates and this debt does not count against their maximum allowed debt. Their non-SBA borrowing is usually some combination of fixed and variable rate debt, although a very few have no variable rate debt.

Probably the most important metrics for a BDC are 1) its book value, 2) the percentage of its dividend covered by its net investment income (NII), and 3) its operational costs. Some trade at considerable premiums to BV and others at considerable discounts. The markets price in these premiums and discounts according to how secure the dividend is perceived to be, which is strongly influenced by dividend coverage. Those priced at a premium to BV almost invariably pay a lower yield than those priced at a discount. This is actually rational because historically those that trade at a discount have had to reduce their dividend much more often than the others. Those that cover their dividend from NII with the most to spare are also those that trade at a premium to BV.

Operational costs are strongly influenced by how it is managed. Some are internally managed and others are externally managed. Those that are internally managed have lower operational costs. These costs have an effect on the amount of risk that management takes with investments. The higher the costs, the more risk to maintain the same dividend.

MAIN has the highest premium to BV of any BDC, the highest dividend coverage of any BDC, and not coincidentally, the lowest operating costs.

Using cash flow to value a BDC is the wrong approach. If you have FAST Graphs, look at MAIN. There is a big difference between EPS valuation and CF valuation. However, neither of these will tell you NII, which is what you really need. Try following BDC Buzz on Seeking Alpha.
Reply
#5
(03-10-2015, 01:59 PM)Be Here Now Wrote:
(03-07-2015, 08:56 PM)Roadmap2Retire Wrote: You raise a great point, Joey. I took some comfort in the fact that the negative cash flow seems to be the norm in most BDCs - probably just the way the companies are structured and operated...since their main focus is investing - their cash flow from investing puts them in that section. I realize that BDCs have to meet certain criteria like REITs do (such as distribute 90% of their income in case of REITs). I am not yet clear on what the official rule of law for BDCs is....now that you raise that question...I will be spending some time reading up and research more (esp now that I have some skin in the game).

If you or others have/come across more info, please share.

I am retired and invest for income, so I own several BDCs for the income. I do not own them for capital growth. If I were decades away from retiring I would be very hesitant to own a BDC. They do not have a long term track record, and they do not supply products that we cannot get along without, unlike mighty MO or GIS or PG or CL or PEP.

They lend money to small and medium sized companies, some listed, mostly unlisted, and a few lend to venture capital startups that are late in the venture capital cycle. They can also invest in a company's equity. Their lending is some combination of first lien senior debt, 2nd lien senior debt, subordinated debt, and a few invest in CLOs. They are limited to a maximum of 30% investment in non-qualified securities such as CLOs.

Their capital is a combination of equity and debt. The most debt they can have is the value of their equity, but in practice they invariably have less debt than equity. Some qualify to borrow from the SBA at low interest rates and this debt does not count against their maximum allowed debt. Their non-SBA borrowing is usually some combination of fixed and variable rate debt, although a very few have no variable rate debt.

Probably the most important metrics for a BDC are 1) its book value, 2) the percentage of its dividend covered by its net investment income (NII), and 3) its operational costs. Some trade at considerable premiums to BV and others at considerable discounts. The markets price in these premiums and discounts according to how secure the dividend is perceived to be, which is strongly influenced by dividend coverage. Those priced at a premium to BV almost invariably pay a lower yield than those priced at a discount. This is actually rational because historically those that trade at a discount have had to reduce their dividend much more often than the others. Those that cover their dividend from NII with the most to spare are also those that trade at a premium to BV.

Operational costs are strongly influenced by how it is managed. Some are internally managed and others are externally managed. Those that are internally managed have lower operational costs. These costs have an effect on the amount of risk that management takes with investments. The higher the costs, the more risk to maintain the same dividend.

MAIN has the highest premium to BV of any BDC, the highest dividend coverage of any BDC, and not coincidentally, the lowest operating costs.

Using cash flow to value a BDC is the wrong approach. If you have FAST Graphs, look at MAIN. There is a big difference between EPS valuation and CF valuation. However, neither of these will tell you NII, which is what you really need. Try following BDC Buzz on Seeking Alpha.
I got a good laugh from the last sentence in the first paragraph. By the way, did you read the eponymous book?
Reply
#6
BHN, thanks for the very interesting insight.

MAIN seemed a little more expensive to me than other BDCs but I dipped my toe into MAIN because they seemed pretty conservative and transparent from their reports. Like T, I intend to use the cash from dividends to add to other holdings and not reinvest for now. At around 1% of the portfolio, I'm not too concerned about the ups and down and I get to watch the results. I don't know about others but I tend to spend more time thinking about the business with a little skin in the game.
=====
How do they get the deer to cross at that yellow road sign?

Reply
#7
Supplemental cash dividend of $0.275 per share in addition to regular monthly cash dividends declared by Main Street Capital (MAIN)

Ex-div 6/16; Record 6/18; Payment 6/25
Reply




Users browsing this thread: 1 Guest(s)