Stellus Capital Investment Corporation has been recognized for its strong potential in generating passive income, particularly following a recent pullback in its stock price.
This business development company (BDC) has demonstrated resilience by covering its dividend with net investment income in the first quarter of 2024, despite a slight increase in the payout ratio.
The company’s exposure to a high percentage of floating-rate loans positions it well to benefit from a higher-for-longer interest rate environment, further solidifying its appeal.
Portfolio Review
Stellus Capital Investment Corporation is structured as an externally-managed BDC under the Investment Company Act of 1940. Its primary investment focus is on middle-market companies, typically privately held, with annual EBITDA ranging from $5 million to $50 million.
As of March 31, 2024, Stellus Capital Investment reported an investment portfolio valued at $875.9 million, with the majority being Senior Secured First Liens. Senior Secured Loans, including First and Second Liens, collectively amounted to $794.8 million, or 91% of the total portfolio value. The portfolio value saw a modest increase of $1.4 million compared to the previous quarter.
One notable feature of Stellus Capital Investment is its strategic positioning to benefit from interest rate hikes. With 98% of its loans being floating-rate, the company stands to gain from an environment where inflation persists and interest rates remain high.
Should inflation continue above 3%, it is likely that the central bank will maintain elevated interest rates, benefiting Stellus Capital Investment’s net investment income growth in the latter half of 2024.
Financial Performance
In the first quarter of 2024, Stellus Capital Investment earned $26.0 million in total investment income, marking an 8% year-over-year increase. Net investment income was reported at $10.2 million, a 13% increase from the previous year, bolstered by strong non-interest income sources and an income incentive fee waiver.
Despite the central bank’s reluctance to lower interest rates, Stellus Capital Investment is well-positioned to thrive in the current rate environment. The company’s aggressive leaning on floating-rate loans is expected to drive net investment income growth, providing a cushion against potential economic downturns.
Dividend Payout and Coverage
Stellus Capital Investment has consistently covered its dividends with net investment income. The current dividend stands at $0.1333 per share per month, translating to an annualized yield of 12%. In the first quarter of 2024, the dividend payout ratio was 91%, and 82% over the last twelve months.
The company’s ability to cover its dividend is indicative of its strong financial health and strategic positioning.
Looking ahead, there is potential for the company to improve its dividend payout ratio. If the central bank maintains its current stance on interest rates, Stellus Capital Investment could see further net investment income growth, enhancing the margin of safety for passive income investors and potentially lowering the dividend payout ratio.
Valuation
Stellus Capital Investment’s stock is currently trading at a moderate premium to net asset value (NAV), approximately 3%. This valuation is considered sensible given the company’s strong fundamentals and potential for growth. For comparison, other BDCs such as Ares Capital Corp. (ARCC), Golub Capital BDC Inc. (GBDC), and Blue Owl Capital Corp. (OBDC) also trade at small premiums to NAV, up to 10%.
Stellus Capital Investment’s moderate valuation, combined with its solid dividend coverage and growth prospects, suggests that the stock is attractively priced.
Future Prospects and Risks
Stellus Capital Investment is poised to benefit from a higher-for-longer interest rate environment, given its high percentage of floating-rate loans. The company’s strategic investments and robust portfolio management are expected to drive net investment income growth, supporting its attractive dividend yield.
However, there are inherent risks associated with high-yielding BDCs. While Stellus Capital Investment’s dividend is well-covered, the high yield reflects underlying risks that investors should consider. These risks include potential economic downturns, changes in interest rate policies, and fluctuations in market conditions.
Attractive Investment for Passive Income
Stellus Capital Investment Corporation presents a compelling opportunity for passive income investors. The company’s ability to cover its dividends with net investment income, combined with its strategic positioning in a higher-for-longer interest rate environment, supports its attractive yield.
The recent pullback in the stock price offers a potential buying opportunity, as Stellus Capital Investment continues to demonstrate strong financial performance and growth prospects.
DISCLAIMER
You should read and understand this disclaimer in its entirety before joining or viewing the website or email/blog list of SmallCapStocks.com (the “Publisher”). The information (collectively the “Advertisement”) disseminated by email, text or other method by the Publisher including this publication is a paid commercial advertisement and should not be relied upon for making an investment decision or any other purpose. The Publisher is engaged in the business of marketing and advertising the securities of publicly traded companies in exchange for compensation. The track record, gains, upside, and/or losses mentioned in the Advertisement, if any, should not be considered as true or accurate or be the basis for an investment. The Publisher does not verify the accuracy or completeness of any information included in the Advertisement. While the Publisher does not charge for the SMS service, standard carrier message and data rates may apply. To unsubscribe from receiving promotional text messages to your phone sent via an autodialer, using your phone reply to the sender’s phone number with the word STOP or HELP for help.
The Advertisement is not a solicitation or recommendation to buy securities of the advertised company. An offer to buy or sell securities can be made only by a disclosure document that complies with applicable securities laws and only in the states or other jurisdictions in which the security is eligible for sale. The Advertisement is not a disclosure document. The Advertisement is only a favorable snapshot of unverified information about the advertised company. An investor considering purchasing the securities, should always do so only with the assistance of his legal, tax and investment advisors. Investors should review with his or her investment advisor, tax advisor or attorney, if and to the extent available, any information concerning a potential investment at the web sites of the U.S. Securities and Exchange Commission (the "SEC") at www.sec.gov; the Financial Industry Regulatory Authority (the "FINRA") at www.FINRA.org, and relevant State Securities Administrator website and the OTC Markets website at www.otcmarkets.com. The Publisher cautions investors to read the SEC advisory to investors concerning Internet Stock Fraud at www.sec.gov/consumer/cyberfr.htm, as well as related information published by the FINRA on how to invest carefully. Investors are responsible for verifying all information in the Advertisement. As an advertiser, we do not verify any information we publish. The Advertisement should not be considered true or complete.
The Publisher does not offer investment advice or analysis, and the Publisher further urges you to consult your own independent tax, business, financial and investment advisors concerning any investment you make in securities particularly those quoted on the OTC Markets. Investing in securities is highly speculative and carries an extremely high degree of risk. You could lose your entire investment if you invest in any company mentioned in the Advertisement. You acknowledge that we are not an investment advisory service, a broker-dealer or an investment adviser and we are not qualified to act as such. You acknowledge that you will consult with your own independent, tax, financial and/or legal advisers regarding any decisions as to any company mentioned here. We have not determined if the Advertisement is accurate, correct or truthful. The Advertisement is compiled from publicly available information, which include, but are not limited to, no cost online research, magazines, newspapers, reports filed with the SEC or information furnished by way of press releases. Because all information relied upon by us in preparing an advertisement about an issuer comes from a public source, it is not reliable, and you should not assume it is accurate or complete.
By your subscription to our profiles, the viewing of this profile and/or use of our website, you have agreed and acknowledged the terms of our full disclaimer and privacy policy which can be viewed at the following link: www.SmallCapStocks.com/Disclaimer and www.SmallCapStocks.com/Privacy-Policy
By accepting the Advertisement, you agree and acknowledge that any hyperlinks to the website of (1) a client company, (2) the party issuing or preparing the information for the company, or (3) other information contained in the Advertisement is provided only for your reference and convenience. The advertiser is not responsible for the accuracy or reliability of these external sites, nor is it responsible for the content, opinions, products or other materials on external sites or information sources. If you use, act upon or make decisions in reliance on information contained in any disseminated report/release or any hyperlink, you do so at your own risk and agree to hold us, our officers, directors, shareholders, affiliates and agents harmless. You acknowledge that you are not relying on the Publisher, and we are not liable for, any actions taken by you based on any information contained in any disseminated email or hyperlink.
I’m Jackson Hartwell, a writer who specializes in dissecting current business events. I’m dedicated to providing you with clear and concise insights into the world of politics, making it easier to understand the latest news and developments.
