Fidus Investment: 12% Yield, Solid Coverage, Low NAV Premium

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Fidus Investment: 12% Yield, Solid Coverage, Low NAV Premium

seekingalpha09-09

Fidus Investment easily covered its base dividend with adjusted net investment income in Q2, ensuring sustainability even amid recession fears.The BDC focuses on First Lien debt, offering a compelling...

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Henrik Sorensen Fidus Investment (NASDAQ:FDUS) easily earned its base dividend with adjusted net investment income in the second quarter. In my view, Fidus Investment can sustain, at a minimum, its regular $0.43 per share dividend, even if the U.S. economy is forced into a recession. Recession fears have led to another stock plunge last week as the August payroll report missed the consensus forecast by a wide margin. Since Fidus Investment is also primarily focused on First Lien debt and produces substantial excess dividend coverage based on run-rate adjusted net investment income, I think that Fidus Investment is a compelling BDC investment for passive income investors. My Rating History My last stock classification on Fidus Investment was hold primarily because Fidus Investment paid a substantial amount of supplemental dividends in the last year as a means to distribute excess portfolio income. I think that Fidus Investment offers passive income investors a high quality investment portfolio and competitive dividend yield that should be sustainable even in case of a U.S. recession. Portfolio Review, NII Growth And Dividend Pay-Out Metrics Fidus Investment is structured as a business development company under the Investment Company Act of 1940. The BDFC primarily focuses on the lower middle market segment that includes companies with annual sales between $10 and $150 million. Primarily, Fidus Investment invests in First Lien and Second Lien debt, as most business development companies tend to do. First Liens remained the most dominant asset class in the company’s portfolio, with 71% of all debt investments falling into this category in the last quarter. As of June 30, 2024, Fidus Investment owned a portfolio valued at $1.1 billion, reflecting a $30 million QoQ increase, and included a number of Subordinated Debt and Equity investments as well.   Debt Portfolio (Fidus Investment Corporation) Fidus Investment earned $16.95 million in net investment income from its First Lien-dominated investment portfolio, reflecting 1% YoY growth. Higher total investment income benefited Fidus Investment in the last year, but it was offset by higher interest expenses, management and incentive fees. Be that as it may, Fidus Investment still produced substantial excess dividend coverage in 2Q24.   Net Investment Income (Fidus Investment Corporation) Fidus Investment produced adjusted net investment income of $0.57 per share in the second quarter, compared to a dividend pay-out of $0.43 per share (base dividend). The business development company also paid a $0.16 per share supplemental dividend as a way to distribute excess portfolio income. The 2Q24 dividend pay-out ratio based on the base dividend was 75% compared to a twelve-month pay-out ratio of 67%. Fidus Investment’s low base dividend pay-out ratio and its excess portfolio income allowed the company to pay a generous amount of supplemental dividends to passive income investors in the last year, and this payment stream is continuing: For the present quarter, Fidus Investment announced a supplemental dividend of $0.14 per share which is payable on September 26, 2024, to stockholders of record as of September 19, 2024, so passive income investors buying the BDC’s stock before 9/19/2024 still get to collect the supplemental dividend for the third quarter. Based on the base dividend, Fidus Investment’s stock presently pays an 8.6% yield. Since the business development company has a history of paying supplemental and special dividends, the effective dividend yield is going to be much higher: Based on 2Q24 run-rate dividends (base and supplemental), Fidus Investment could pay a stock yield of 11.8%.   Dividend (Author Created Table Using BDC Information) Tiny Premium To NAV Fidus Investment is selling at a tiny premium to its net asset value: The BDC’s net asset value as of June 30, 2024 stood at $19.50 per share, up $0.14 per share since the end of 1Q24. Since Fidus Investment’s stock is selling for $19.99 at the time of writing this article, the NAV report equates to a 3% premium to net asset value. BDCs have seen growing pressure on their valuations as of late, which is linked to wide-spread expectations that the central bank is going to slash interest rates at its Fed meeting later this month. For BDCs, particularly those with floating-rate investment investments, this poses a risk as far as the company’s profit growth is concerned. Compared to other business development companies, including Ares Capital (ARCC), Golub Capital BDC (GBDC) and Blue Owl Capital (OBDC), Fidus Investment is moderately valued and is neither overly expensive nor overly cheap. In my view, Fidus Investment still classifies as a ‘Hold’ here, but I would be tempted to modify my stock classification to ‘Buy’ if the stock starts to sell at least for a 5% discount to net asset value. Data by YCharts Why The Investment Thesis Might Not Work Out There is considerable uncertainty about the potential for a recession after last week’s jobs report. The latest payroll data indicated 142,000 jobs were added to the U.S. economy in August, which missed the consensus forecast of 163,000 jobs. A slowing economy is bad news for business development companies, particularly those with floating-rate postures that have greatly benefited from a higher-for-longer rate environment. A slowing economy implies rate cuts, which could seriously imperil the BDC’s prospects for profit growth and be an anchor for Fidus Investment’s valuation. My Conclusion Fidus Investment still looks like a healthy BDC investment option for passive income investors, as the business development company easily covered its base dividend with adjusted net investment income in the second quarter. The portfolio is growing, performing well, and the BDC has no issues whatsoever meeting its dividend obligations. I continue to see potential for Fidus Investment to return excess portfolio income to passive income investors through the distribution of supplemental dividends, primarily because Fidus Investment works with a low 67% LTM dividend pay-out ratio.  That the stock is only selling at a 3% premium to net asset value, in my view, makes Fidus Investment a solid ‘Hold’ for passive income investors.","kind":null,"is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"hasMoreComments":false,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false}}