Updated on April 24th, 2022 by Felix Martinez

Business Development Companies – or BDCs, for short – can be a great source of current yield for income investors.

Main Street Capital Corporation (MAIN) is a great example of this. This BDC has a current dividend yield of 6.1%. Better yet, Main Street Capital Corporation pays monthly dividends.

You can download our full Excel spreadsheet of all monthly dividend stocks (along with metrics that matter like dividend yield and payout ratio) by clicking on the link below:

 

The stock’s high dividend yield and monthly payments make it a solid choice for income investors. But what about the strength of the underlying business?

Fortunately for investors, Main Street Capital’s business appears to be performing well. This article will discuss the investment prospects of Main Street Capital Corporation in detail.

Business Overview

Main Street Capital Corporation is a Business Development Company, or BDC. You can see our full BDC list here.

The company operates as a debt and equity investor for lower middle market companies (those with $10-$150 million of annual revenues) seeking to transform their capital structures. The BDC has the capability to invest in both debt and equity, which gives it a significant advantage over companies who invest in private debt or private equity alone.

Main Street Capital Corporation also invests in the private debt of middle-market companies (not lower middle-market companies) and has a budding asset management advisory business.

Source: Investor Presentation

The BDC’s corporate structure is rather simple. Main Street Capital Corporation operates three funds:

• The Main Street Mezzanine Fund
• The Main Street Capital II Fund
• The Main Street Capital III Fund

Since Main Street Capital Corporation is the operator of its own investment funds, management fees are kept to a minimum, which gives it a cost-based competitive advantage over its competitors who outsource their fund management.

Main Street Capital Corporation’s holdings are highly diversified by both transaction type and geography. By transaction type, the BDC acquires most of its deals via recapitalization and leveraged buyouts. Main Street Capital Corporation also has a very high degree of diversification by industry.

Growth Prospects

Main Street Capital Corporation’s growth prospects come from its unique strategy of driving investment returns. Investors who own the stock are rewarded as the BDC sustains its high monthly dividend and grows it over time.

At the business level, Main Street Capital Corporation’s growth will be driven by its expertise in the lower middle market segment of the economy.

On February 24th, Main Street Capital released fourth-quarter and full-year results for 2021. Net investment income of $39.8 million was a 9% increase compared to $36.5 million a year ago. The corporation generated a net investment income of $182.7 million for 2021 a 32% increase compared to $137.9 million in 2020. The corporation generated a net investment income per share of $2.65, up 26% from last year’s income of $2.10 per share. Distributable net investment income per share totaled $2.81, up 24% from $2.26 in 2020.

Main Street’s net asset value per share increased compared to the end of 2020, from $22.35 to $25.29. The corporation declared monthly dividends of $0.215, representing an annual dividend of $2.58 per share. As of the end of the fourth quarter of 2021, the corporation had aggregate liquidity of $567.6 million, consisting of $32.6 million in cash and cash equivalents, $535 million of unused capacity under the revolving credit facility, which will maintain the support of its investment and operating activities.

To conclude, Main Street Capital Corporation has expertise in the lower middle market of its industry and has a budding asset management business that enables it to have strong operational leverage. These factors will drive the BDC’s growth for the foreseeable future.

Source: Investor Presentation

Dividend Analysis

As mentioned above, the company pays a monthly dividend. The company has been paying a monthly dividend since the end of 2008. Since that time, the dividend has been rising. Over the last 14 years, the company dividend has had a compound annual growth rate of 12.3%. We do not expect this kind of dividend growth rate to continue into the future, but we do expect the company to continue to grow its dividend.

Throughout the years, the company has also paid supplemental dividends of $4.215. These are one-off special dividends. We also expect the company to continue this tradition of special dividends.

The dividend safety is of concern. For example, based on earnings, the company had dividend payout ratios of over 100% for the last 9 years. However, we expect the company to earn $2.75 per share in 2022, which will give us a dividend payout ratio of 94%. This is still high, but is sustainable.

In order to avoid corporate income tax as a BDC, Main Street must distribute at least 90% of its taxable income, leaving little wiggle room to fund growth. While this strategy has worked extremely well since the last recession, we do caution that this method of funding becomes substantially less attractive (and more expensive) in lesser times.

Source: Investor Presentation

Final Thoughts

Although Main Street Capital Corporation is off-the-radar for most dividend growth investors, this BDC has a strong history of delivering substantial shareholder returns.

The firm’s strong track record of superior investment management and expertise in the lower middle market segment gives it a strong competitive advantage in the private equity and debt industry.

Further, Main Street Capital Corporation is shareholder-friendly with a high yield and monthly payouts. The stock’s high yield and monthly dividend payments might be suitable for income investors, although the modest expected rate of return of 7.4% over the next five years coming mostly from the high dividend yield of 6.2% keeps the stock as a hold recommendation right now.

Further Reading: 5 No-Brainer BDCs Yielding More Than 5%