Gladstone Capital Stock: A Dividend Gem Now Yielding 8.3% (NASDAQ:GLAD)
Market declines can be an investor’s best friend or worst enemy, depending on the position of their portfolio. For those with a strong bias toward non-dividend paying growth stocks, unrealized losses are no fun to watch, and some may even forgo reviewing their brokerage accounts in hopes of better days ahead.
On the contrary, falling stock prices provide income-oriented investors with an opportunity to buy their favorite stocks cheaply, while their yields are high. This brings me to Gladstone Capital (NASDAQ:GLAD), whose share price weakness now presents an opportunity for income investors to layer on an attractive yield. This article highlights what makes GLAD a good buy right now, so let’s get started.
Gladstone Capital is a BDC managed externally by Gladstone Management Corp., with its namesake David Gladstone serving as chairman of the company. It is owned by the Gladstone family of companies, including REITs Gladstone Land (LAND), Gladstone Commercial (GOOD) and its BDC counterpart, Gladstone Investment (GAIN).
What distinguishes GLAD from its BDC sister, GAIN, is that it has lower exposure to equity investments and higher exposure to secured debt. This makes GLAD a traditional BDC with a more assured recurring revenue stream. As shown below, 86% of GLAD’s investment portfolio is comprised of secured debt (70% first lien, 16% second lien), with the remaining 14% comprised of equity for a faster potential increase in its net asset value per share.
GLAD’s current portfolio is valued at $538 million and is diversified across 45 companies in 13 different industries. The portfolio consists primarily of economically essential sectors, including services, child care and manufacturing. It also targets companies in the lower middle market, whose market is fragmented and has limited access to traditional funding sources. This translates into attractive investment spreads for GLAD, as evidenced by its current weighted average portfolio yield of 10.2%.
Additionally, the majority of GLAD’s portfolio is backed by private equity sponsors. This is beneficial to the portfolio company as it has an automatic source of institutional governance, strategic industry information and advice from the private equity firm. As shown below, 74.5% of GLAD’s portfolio is supported by sponsors, with an additional 3% controlled by GLAD.
Notably, GLAD’s net asset value per share increased $0.24 on a sequential quarterly basis, but net investment income per share decreased 5.1% over the same period to $0. $.25. This was primarily due to lower net issuance during its fiscal second quarter (ending March 31) given weak market conditions. But above all, the dividend (paid monthly) remains well covered by a distribution rate of 81%.
Risks to GLAD include a deeper than expected economic recession, which could suppress business activity and harm its portfolio companies. This is offset by potential benefits from higher interest rates, as 90% of GLAD’s debt placements are floating rate, while 90% of GLAD’s borrowings are fixed rate. Thus, a rise in interest rates would result in larger investment spreads for GLAD.
Additionally, GLAD maintains high balance sheet flexibility to make additional investments, as it has a low debt-to-EBITDA ratio of 68.5%, well below the regulatory limit of 200%. This ability to fund its pipeline was highlighted by management during the recent conference call:
The company is on a good streak right now and continues to invest in growth-oriented middle market companies with good management, and many of these investments are backed by mid-sized private equity funds that are still looking for an experienced partner to support the acquisition. and the growth of the business in which they invest. This gives us the opportunity to make attractive investments and these investments are interest-bearing loans, and they support their ongoing commitment to pay cash distributions to our shareholders.
Meanwhile, I see value in GLAD after the stock’s recent plunge from a high of $12.78 hit recently in April to just $9.78 currently, pushing the dividend yield to 8.3%. This translates to a price-to-book ratio of just 1.03x, well below the range of around 1.25x it has traded at for most of the past 12 months. Analysts on the sell side have an average price target of $11, implying a potential total return of 21% over one year, including dividends.
Key takeaway for investors
Income investors seeking exposure to well-managed BDCs might consider GLAD for its high, well-hedged dividend yield, as well as its potential upside in a rising interest rate environment. While the risks include a more protracted economic downturn, I believe they are more than offset by GLAD’s attractive valuation and the aforementioned benefits from higher rates. As such, the current price of GLAD stock appears to present a good opportunity for high earnings.