Jul. 1 at 9:58 PM
Is the dividend from
$MAIN safe?
At the end of the day, growing NII and NAV per share is about ensuring the company continues to pay and grow their dividend.
Main Street recently increased its regular monthly dividend from
$0.26 to
$0.265 per share.
At the new rate, shareholders will receive
$0.795 in regular dividends each quarter, or
$3.18 annually.
The company has also continued paying a
$0.30 quarterly supplemental dividend, equivalent to another
$1.20 per share annually.
Combined, this produces a forward dividend rate of
$4.38 per share.
But it's important to note that BDCs technically have two dividend rates, or dividend yields.
That would be the base yield and the total yield, which includes the supplemental dividends.
Without special dividends, MAIN's yield drops from 8.59% all the way down to 6.16%.
Still a high yield, but certainly a notable drop.
The
$3.18 regular annual dividend is intended to be supported by recurring distributable net investment income.
The additional
$1.20 in supplemental dividends gives Main Street flexibility to distribute excess investment income, or portfolio company dividends and realized capital gains, without permanently increasing its fixed monthly obligation.
Based on management’s preliminary outlook, Main Street expects second-quarter distributable net investment income before taxes of at least
$1.00 per share.
That compares with a regular quarterly dividend obligation of
$0.795, producing expected base-dividend coverage of approximately 1.26 times.
In other words, Main Street is currently generating about
$0.205 per share more in quarterly DNII than it needs to fund the regular dividend.
That's a cushion that I'm comfortable with, especially for a BDC.
Base dividend coverage of 126% is one of the strongest in the BDC market.
The sustainability of the supplemental dividend is a bit different, though.
The regular and supplemental payments together amount to
$1.095 per quarter.
Therefore, the expected DNII of at least
$1.00 per share would not fully cover the entire quarterly distribution on its own.
There would be a gap of approximately
$0.095 per share. That does not necessarily mean the supplemental dividend is unsustainable. Main Street has several additional sources of distributable value beyond recurring DNII, including portfolio-company dividends, realized gains from equity investments, and previously retained taxable income.
The recent exit from Centre Technologies is an excellent example.
Main Street generated a
$46.4 million realized gain from its equity position, providing substantial additional support for shareholder distributions.
This is a key advantage of Main Street’s lower-middle-market strategy.
Unlike a BDC that relies almost entirely on lending spreads, Main Street frequently owns equity alongside its debt investments. Successful exits can therefore produce large realized gains that help fund supplemental dividends even when quarterly DNII does not cover the entire payout.
With that being said, it is worth noting that it is completely possible, based on the numbers we just laid out, that MAIN pulls back its supplemental dividends slightly over the next 6-12 months.
If DNII remained near
$1.00 per quarter, Main Street would generate approximately
$4.00 per share in annual recurring distributable income.
That would fully cover the
$3.18 regular dividend but fall about
$0.38 short of the total
$4.38 forward payout.
Main Street would therefore need to generate at least
$0.38 per share annually from additional sources to maintain the current supplemental dividend rate.
Basically, just know the yield most software's show you at 8.59% right now may not be the true yield you get over the next 12 months.
