Welcome to the sixth installment of my portfolio series, where I analyze all 31 stocks currently in my personal portfolio. Today, we’ll be taking a detailed look at Main Street Capital, ticker symbol MAIN.
My Holdings and Dividends
Logging into my Vanguard account, where I manage all my dividend investing, I currently own 225 shares of Main Street Capital. The stock pays monthly dividends, with the most recent payment being 23 cents per share. With my current holdings, I collect approximately $51.78 every month in dividends from Main Street Capital.
About Main Street Capital Corporation
Main Street Capital is a business development company (BDC) that provides one-stop capital solutions, including private debt and private equity capital, to lower middle market companies and debt capital to middle market companies. Their portfolio investments are typically made to support management buyouts, recapitalizations, growth financing, refinancing, and acquisitions of companies operating in diverse sectors. As an internally managed BDC, Main Street Capital stands out for its long-term growth in both share price and dividend increases.
Founded in 2007, Main Street Capital had its IPO in the same year and now manages approximately $6.6 billion in capital. According to the Sovereign Wealth Fund Institute, they are currently the eighth largest BDC in the world. Main Street Capital has had one of the best track records among BDCs for long-term growth, thanks to their consistent dividend increases and share price appreciation.
Dividend Growth and Stability
One of the unique aspects of Main Street Capital is their ability to grow their dividends consistently. Even before the recent rise in interest rates, which has led many BDCs to increase their dividends due to floating rate debt, Main Street Capital has been growing their dividends for more than 15 years. Their stock pays monthly dividends, making it a popular choice for investors seeking regular income. Throughout their history, Main Street Capital has never cut its dividend, managing to maintain payouts even during the 2008 financial crisis and the COVID-19 pandemic.
Their dividends have grown 109% since their IPO, and they have paid $4.89 in special dividends. This growth is coupled with consistent share price appreciation. As of this video, Main Street Capital’s share price has increased by 164% since their IPO. This growth has made Main Street Capital a stock that consistently outperforms the S&P 500 over time. Using a DRIP (dividend reinvestment plan) calculator, we can see that Main Street Capital has provided an average annual return of 15.84%, compared to the S&P 500’s 8.46% average yearly return during the same period.
Premium Valuation and NAV Growth
One notable characteristic of Main Street Capital is that it almost always trades at a premium. Over the past five years, the only time the stock traded at a discount was briefly in March 2020. This consistent premium valuation reflects the market’s willingness to pay a higher price for Main Street Capital’s quality. The company’s ability to grow its net asset value (NAV) over the years is a key driver of its success. While most BDCs trade around their NAV and see limited growth, Main Street’s NAV has increased significantly.
Main Street Capital’s growth in NAV is driven by three distinct features:
- Investment Focus:
Main Street prioritizes equity investments in lower middle market companies. Unlike senior secured debt, equity investments offer greater growth potential but are also riskier. Main Street’s focus on lower middle market companies provides opportunities for growth as these companies often lack access to traditional capital sources. - Asset Management Services:
Main Street’s asset management business generates additional income and diversifies revenue streams. By serving as an investment advisor to third-party clients, Main Street earns management fees and incentive fees, contributing to overall revenue. - Internal Management:
Being internally managed gives Main Street a cost advantage over externally managed BDCs. Internal management leads to lower costs, as the company does not pay an external firm to manage its investments. This structure aligns management’s incentives with shareholders’ interests, as compensation is tied to the company’s performance.
Investment Portfolio and Diversification
Main Street Capital’s investment portfolio is well-diversified across various sectors. Their largest sector, software, constitutes only 8% of their portfolio, indicating a balanced approach. Other significant sectors include healthcare, distributors, chemicals, and electrical equipment. Main Street has 195 different investments across their lower middle market, private loan, and middle market portfolios.
However, Main Street does have 13 investments on non-accrual status, which is higher than typical for a BDC. Fortunately, these non-accrual investments represent only 0.6% of their total investment portfolio at fair value and 3.2% at cost. While the number of non-accruals is noteworthy, their minimal impact on the overall portfolio is reassuring.
Insider Ownership and Management Confidence
Main Street Capital has a high insider ownership percentage of 4.1%, which is significantly higher than the average for BDCs. High insider ownership indicates strong confidence from the CEO and management team in the company’s performance. When those who know the company best are willing to invest their own money, it often signals a positive outlook.
Dividend Performance and Market Position
Main Street Capital has excelled in providing both dividend growth and income stability. For investors focused on dividend growth investing and income investing, MAIN offers an attractive combination. Their consistent dividend increases, coupled with special dividends, provide a reliable income stream. The company’s ability to outperform the S&P 500 further solidifies its position as a top choice for dividend investors.
Conclusion
Main Street Capital has proven to be an excellent investment for those seeking both dividend growth and stable income. Its ability to navigate economic downturns without cutting dividends and its consistent share price appreciation make it a standout BDC. While there are few BDCs that match Main Street’s performance, it remains one of my favorites and a cornerstone of a solid dividend portfolio.
