Analyzing Main Street Capital (MAIN)

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Last week, Main Street Capital presented its quarterly earnings report, and things are looking really interesting. Known for paying a solid monthly dividend, this company has attracted many investors. But what if I told you that you were better off owning the S&P 500 in the past five years when we look at total returns, including dividends? Well, obviously, many companies fail to beat the S&P 500. That doesn’t necessarily mean you should avoid these, since the future might be very different. So, let’s see what Main Street showed in the earnings report.


Main Street Earnings Report

When we dive into the investor relations report, we immediately see the dividend growth streak. This is something they are really proud of—and with reason. Since 2007, they have increased the dividend by 123%. On top of that, they also pay a lot of supplemental dividends. In the last 12 months alone, they’ve paid $1.18 per share. The net asset value and distributable net investment income (DNI) have also been increasing quite consistently over the years, giving confidence for the future ahead.

One of the things that is very important with companies like Main Street is diversification. You don’t want the risk of being exposed too much to one industry. That’s why it’s good to see a maximum of 10% exposure in any single industry, and the biggest industry is only at 7%. This is looking really solid. In terms of geographical breakdown, we also see a nice diversification across the states.

Looking at the total investment income, we see that year-to-date, this number is reported at 2 (data incomplete). DNI is reported also at 6% (data incomplete). Although there is still some decent growth, we do see a slowdown versus previous years.

Examining the income statement summary, quarter over quarter, there is a minor increase in total investment income. Year over year, it is looking again pretty decent with a 4% increase. Expenses did increase quite a bit, with 9%, and because of that, net investment income decreased by 97 basis points. Obviously, we would like to see things differently here. The DNI per share is down 4% year-over-year, and the interesting part is that the net increase in net assets is down versus previous years.

Now that we know a bit more about the company, it is time to check the fundamentals.


Main Street Fundamentals

By diving into the fundamentals, Main Street is a $4.2 billion market cap company. The P/E ratio is at 9.2, indicating they are undervalued. Later in this article, I will show you my three price targets for Main Street stock, so make sure to read until the end because the P/E ratio is only telling a small part of the full story here.

Revenue is at $540 million, and we see that revenue went up in the long run. Of course, we see the impact during COVID, and most recently, revenue is slowing down a little bit. Margins have been going up and down in the past decade. During the lockdown periods, margins crashed, and after that, they recovered pretty quickly. Most recently, it is kind of stabilizing. EPS follows pretty much the same story as the revenue and the margins; nothing special to add here.

Analysts expect that EPS will decrease from here in the coming two years, which feels a bit random to me. I don’t see a clear reason why this would happen, to be honest. For the revenue, analysts expect pretty much the same, and again, I don’t see any signs of this actually happening. Especially the 23% decrease feels random to me.

Return on assets is sitting at nearly 10%, which is a decent number. Return on equity is reported at 17.5%, which is a great number. This is also one of the most important numbers for Main Street.

The current ratio is at 2.4, which is a really high number, and I would prefer a lower number here. Right now, Main Street has $2.2 billion in debt, and I prefer companies that can pay at least a big chunk of their total debt with their total cash. Main Street has $30 million in total cash, so they can’t pay down a big part of their debt. To me, this could be a potential red flag.

So, it is very important that free cash flow is growing since this is used to pay down debt, buy back shares, pay dividends, and other things. Here we see that free cash flow is at a negative number most of the time, and to be honest, I don’t like this at all. Last year, it was finally reported at a positive number, but as of right now, it is negative again.

Shares outstanding are increasing in the long run, which is something that I don’t like in general. But companies like Main Street issue new shares to raise capital, so I don’t mind that much.

When shares outstanding are decreasing, it increases your ownership in a company, increases the EPS, lowers the P/E ratio, and makes it easier to maintain and increase the dividends.


Main Street Dividends

Since we’re talking about dividends anyway, the dividend yield is sitting at 8.4%, which is a great number. Keep in mind that Main Street pays a monthly dividend instead of a quarterly dividend. This number is including supplemental dividends. The correct dividend yield for only regular dividends is 6%, which is still a great number.

The annual payout is at $2.94 excluding supplemental dividends, and as of right now, a little over $4 when including these supplemental dividends. The payout ratio is at 69%, and I prefer 50% or lower. So right now, they have 31% left in cash to buy back shares, pay down debt, do acquisitions, and other things. The 5-year growth rate is at 3.9%, which is a decent number, and they have increased dividends for three years in a row now, which is very nice.

If you take a look at the dividends paid since 2014, you see that Main Street did increase the dividends at a decent rate. However, during the lockdown period, they cut the supplemental dividend, which was a smart move but ended the growth streak according to Seeking Alpha.

Payout ratio is a very important metric with dividends; it tells you if the dividends are safe. Here we see that the payout ratio used to be a bit high, but it is coming down a lot, which is a good thing.

We see the expected dividends in 2024, 2025, and 2026. Of course, this is an estimation and can be highly impacted by results, but it gives you a rough indication. It’s expected to increase at the same rate as the past couple of years, and overall, these dividends look really good to me.


Main Street Returns

I decided to compare Main Street stock with the overall market—in this case, the S&P 500. Next to that, I added ARCC and Gladstone Investment. On the 5-year chart, we see that Main Street was beaten by the S&P 500 by quite a difference. In total, Main Street returned 68%, and keep in mind this is including dividends. The S&P 500 is sitting at 108%, and both ARCC and GAIN were doing a decent job with 81% and 87% returns.

On the one-year chart, things look pretty interesting. Main Street returned 30%, while the S&P 500 is at 23%. So Main Street not only managed to beat the S&P 500 but also ARCC and GAIN.

On the six-month chart, Main Street was again capable of beating the S&P 500 and the two others in this list. On the one-month chart, it looks a bit messy with Main Street actually having one of the lowest returns in this list, but all are at a negative number, so that’s pretty interesting.

Bottom line, Main Street was getting some momentum lately, but on the 5-year chart, the S&P 500 was still the winner, and most recently, the momentum seems to fade away. So, could this be the perfect time to buy Main Street stock? Well, let’s check the three price targets.


Main Street Price Targets

These price targets are created using the Everything Money software, which is one of the best tools out there. I’m using a low, mid, and high assumption to get the three price targets.

Starting off with revenue growth: For revenue growth, I’m filling in 6%, 8%, and 10% based on the historical performance, their own outlook, but also because of the analysts.

For the profit margin, I’m putting in 82%, 84%, and 86%.

For the free cash flow margin, I’m putting in 26%, 28%, and 30%.

For the P/E ratio, I’m putting in 10, and for the price-to-free-cash-flow, I’m putting in 13, 14, and 15.

My desired annual return is 15%, since I can get an easy 10% average annual return with owning an ETF. Usually, I put in 12.5%, but I want to build in a higher margin of safety with this company this time.

Right now, Main Street stock is at almost $49. After analyzing, we see a lot of green numbers. I’m more focused on the multiple earnings value. We have a low price target of $53, a mid price target of $63, and a high price target of $72.

To me, the low to mid price target is the most justified here, so that means they are undervalued based on these numbers. What do you think is the most justified price target here? Let me know your thoughts.


Conclusion

My final conclusion on Main Street is that I love the business. To me, it is a high-risk, high-reward investment in a way. I really love the monthly dividends they pay with these supplemental dividends as well. Most fundamentals look good to me, and of course, there are some concerns with free cash flow margin, debt, and future outlook by the analysts.

Other than that, most things look pretty good from a dividend point of view. I really get excited with a high yield and relatively low payout ratio. From a value point of view, I also get excited with numbers that show Main Street could be undervalued.

Since this is a higher-risk company in my opinion, I’m trying to limit my exposure, meaning I’m waiting for a small pullback before I add more shares, also to have a bigger margin of safety. In the meantime, I keep collecting the dividends and, from time to time, analyzing them.

Remember to always do your own research and never fully trust what I or others say about the stock. I’m not a financial adviser, and this content is just for entertaining purposes only.

I hope you liked this article and that I brought some insights of the company to you. I would really appreciate your feedback, and make sure to subscribe to get notified when I’m posting a new article. Thanks for reading, and I will see you in my next post.

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