Galeanu Mihai
Thesis
We believe that Gladstone Capital (NASDAQ:GLAD) is a great investment for income-oriented investors looking for monthly dividends from a company with stable finances. Gladstone Capital’s current dividend yield is very attractive, and we believe that the company’s diversified portfolio with substantial interest rate risk protection will enable this company to navigate well through uncertain economic times. Our thesis centers on the stability and predictability of this income stream, and we believe that investors should only buy these stocks for income rather than capital appreciation.
Company presentation
Gladstone Capital is a business development company (BDC) that lends to middle-market US companies with annual EBITDA between $3 million and $5 million. As of June 30, 2022, the company manages a portfolio valued at $586 million and holds positions in 49 companies from 14 different sectors. Year-to-date, Gladstone Capital has posted a total return of -8.83%, with the S&P 500 (SPY) down -14.59% and the Financials Sector ETF (XLF) down – 16.18%. The company declared a monthly dividend of $0.0675 for September and trades at an annualized dividend yield of 8.12%.
Stable monthly dividends
Gladstone Capital has a long history of paying monthly dividends, dating back to late 2003. Since 2010, the company has consistently paid a monthly dividend of $0.07 per share to an annual dividend of $0.84 per share until in 2020. In March 2020, the company reduced the monthly dividend from $0.07 per share to $0.065 due to the pandemic. During the month of March 2022, the company increased the monthly dividend to $0.0675 from $0.065 per share. We believe the recent dividend hike shows that management is once again aiming to bring the dividend back to historic levels. Nonetheless, the track record of stable dividend payments on a monthly payout is impressive. While we would like to see dividend payouts increase, we believe that, based on the risk profile, the steady monthly income stream can be beneficial for investors looking for stable and predictable income.
Diversified portfolio
Gladstone Capital has a well-diversified portfolio that provides protection against interest rate risk and other unsystematic risks that would impact certain industries. The company’s portfolio is well-diversified across 14 industries, with the largest sector (Diversified/Conglomerate Services) accounting for only a quarter of the portfolio. Management also reports that 93% of the loan portfolio is floating rate and indexed to LIBOR. This loan term structure will allow the company to benefit from higher interest income as rates continue to rise. In addition, the Company’s portfolio is comprised primarily of a secured tranche in the debt structure, with senior debt representing 73.9% of the portfolio value, while junior debt representing 14.3 %. In the event of major economic difficulties, we believe that the company’s portfolio will be well protected from a significant deterioration in NAV.
Presentation of Gladstone Capital results
Risk for the thesis
For a financial firm lending capital to middle-market companies in the United States, we believe that the main risk to our income-driven thesis is a deeper recession than expected, which could put many out of business. middle market companies. . If the portfolio companies were to fail, Gladstone would see the value of its assets fall and lose interest income. We have already seen a slight decline in QoQ interest income although we have seen the fair value of the portfolio increase over the same period. Nonetheless, in a deep recession, we believe the ability of the financial services company to remain liquid is the most important factor. Fortunately, Gladstone has strong capital, with $11 million in cash and access to $70 million in line of credit. Given that the value of the portfolio is $586 million, access to liquidity represents approximately 15% of the value of the portfolio, which we believe provides a substantial cushion to offset any significant declines in the portfolio.
Conclusion
Gladstone Capital is an attractive investment for income-oriented investors. We believe the company’s dividend policy can provide predictable returns in times of economic uncertainty. Our thesis centers on the predictability and stability of the dividend, and we believe that the company’s diversified portfolio with floating rate loans and a high concentration of secured debt will protect the net asset value and interest income streams of the society.
