At first glance, PennantPark Floating Rate Capital (PFLT) has great appeal for income investors. PFLT is one of 400 stocks with a 5%+ dividend yield.Â
In fact, PFLT has an 8% dividend yield.
Not only that, but PFLT also pays its dividend each month. This allows investors to compound their wealth even faster than a stock that pays a quarterly or semi-annual dividend.
But, as is so often the case with nearly double-digit dividend yields, PFLT’s attractive dividend yield may be too good to be true.
This article will discuss PFLT’s business model, and why the company needs its fundamentals to improve in order for the dividend to be sustainable over the long-term.
Business Overview
PFLT is a business development company, or BDC. It provides mostly debt financing, typically first line secured debt, senior notes, second lien debt, mezzanine loans, or private high-yield debt.
It specializes in making debt investments to middle market companies. To a lesser extent, it also makes preferred and common equity investments.
As of March 31st, PFLT had a total investment portfolio of $731.5 million, consisting of 96 separate investments.
The company’s portfolio breakdown is as follows:
- First-lien, senior secured debt (93% of portfolio)
- Second-lien, secured debt (5% of portfolio)
- Subordinated debt, Common and Preferred equity (2% of portfolio)
PFLT has a highly diversified portfolio in terms if industry groupings.
Source:Â 2017 Investor Presentation, page 9
PFLT went public in April 2011. Since the IPO, it has invested approximately $1.7 billion. PFLT’s investments are generally in a range between $2 million- $20 million.
The investment strategy follows a disciplined approach, which is to seek out target companies with positive and stable cash flow, experienced management teams, and durable competitive advantages.
Growth Prospects
PFLT has positive growth prospects. It has demonstrated a track record of successful investments.
