Tuesday, May 21, 2024

Investors Should Be Glad About Gladstone Capital’s 9% Yield

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Gladstone Capital (Nasdaq: GLAD) is a business development company (BDC) that has invested more than $2.5 billion in over 260 deals since it was founded in 2001.

The company lends money to growth-oriented or recession-proof businesses that can’t get loans from banks.

Gladstone currently has more than 100 investments in a variety of industries. Its portfolio includes…

  • An $11.5 million loan to Axios Industrial, a Texas-based maker of scaffolding and insulation
  • A $20.9 million loan to Imperative Holdings, a developer of oil and gas projects that’s headquartered in Midland, Texas
  • A $10.1 million loan, $7 million preferred equity and some warrants in Salt & Straw, a Portland, Oregon-based ice cream maker with unique flavors like Chocolate Caramel Potato Chip Banana Bread, Strawberry Honey Balsamic with Black Pepper, and Pear & Blue Cheese.

Investors, however, are more concerned with their 9% dividend yield than some crazy ice cream flavors offered by one of Gladstone’s portfolio companies.

So while I can tell you that the Pear & Blue Cheese ice cream is actually quite good (I’ve had it), I’ll have to do a little work to see whether we can say the same about Gladstone’s dividend.

The company’s net investment income has been steadily rising, which we like to see even more than we like to see chocolate combined with peanut butter.

Chart: Gladstone's Solid Net Investment Income Growth
Last year, Gladstone generated $41 million in net investment income while paying out $35.4 million in dividends for a payout ratio of 86%. Since BDCs must pay out at least 90% of their net income (which is different from net investment income), I’m comfortable with payout ratios of up to 100%.

In 2024, net investment income is forecast to rise to $44.6 million, which would lower the payout ratio to 84%.

But while Gladstone’s track record of growing its net investment income is impressive, the company did cut its dividend recently.

After years of keeping its monthly dividend consistent at $0.07 per share, it cut its payout to $0.065 in 2020. It then began raising the dividend in 2022, and today it is substantially higher at $0.165 per share.

I don’t foresee Gladstone having a problem affording its dividend. But the recent cut means the company may not be shy about slashing its dividend again if net investment income turns in the wrong direction.

Dividend Safety Rating: B

Dividend Grade Guide

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