Analyzing PennantPark Floating Rate Capital (PFLT)

Welcome to the seventh 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 PennantPark Floating Rate Capital, ticker symbol PFLT.

My Holdings and Dividends

Logging into my Vanguard account, where I manage all my dividend investing, I currently own a little over 488 shares of PennantPark Floating Rate Capital. The stock pays monthly dividends, with the most recent payment being 10.25 cents per share. With my current holdings, I receive a little over $50 every month in dividends from this stock.

About PennantPark Floating Rate Capital

PennantPark Floating Rate Capital is a business development company (BDC) that focuses on making secondary direct debt, equity, and loan investments. They invest exclusively through floating rate loans in private or thinly traded small market cap public middle market companies. While PFLT primarily invests in the United States, they also invest in non-US companies to a limited extent. Typically, their investments range between $2 million and $20 million per company. In addition to debt investments, PennantPark also invests in equity securities, including preferred stock, common stock, warrants, or options received in connection with debt investments.

According to their website, PennantPark provides funding to companies with proven management teams, competitive market positions, strong cash flow, growth potential, and viable exit strategies. The company had its IPO in 2011, and up to this point, the key word to describe PFLT would be “stable.”

Dividend Stability and Recent Growth

PFLT has been a very stable monthly dividend stock, never cutting its dividend distributions throughout its history. However, they also went a long time without increasing their dividends. If we look at their dividend distribution history, we can see that the company grew its dividend every year for three years, followed by eight years of no dividend growth whatsoever. Finally, in February of this year, PFLT announced an increase to 10 cents per share, and again in May, they increased it another 5% to 10.25 cents per share.

A note on data accuracy: In 2018, there appeared to be a dividend cut and a gap in distributions in 2019, but after double-checking on the company’s website, it was confirmed that there was no dividend reduction or period without payments during those times. This discrepancy highlights the importance of verifying information on the company’s official site if something looks off.

Share Price Performance

PFLT’s share price has also been very consistent since their IPO. There have been periods of fluctuation, but overall, it has remained stable. Right before 2022, when the market became more volatile, PFLT was trading around its IPO price from 11 years ago. Despite the lack of significant share price movement, the stock has offered a high dividend yield of around 10%, making it a stable choice for income investors rather than those seeking share price appreciation or consistent dividend growth.

Investment Strategy and Portfolio

According to PennantPark, one of their priorities is building a portfolio focused on capital preservation. They avoid highly risky companies, which results in less potential for growth but a very steady share price and dividend amount each month. This conservative approach is why they prioritize investing in senior secured loans. While common equity investments offer more growth potential, they are riskier than first lien, second lien, and preferred equity investments. Although PFLT holds some equity investments, they do not constitute a significant portion of their overall portfolio.

Portfolio Breakdown

As of December 31st, PFLT had investments in 126 different companies, with an average investment size of $9.1 million. Their yield at cost is 11.3%, comparable with other BDCs in the current high interest rate environment. The portfolio consists of 87% secured investments, with

the remaining 13% being subordinated debt, preferred equity, and common equity. This breakdown reflects their focus on capital preservation and low-risk investments.

Sector Allocation

Looking at their sector allocation, media is the largest sector at 7.9%, followed by IT services, personal products, diversified consumer services, and healthcare. Initially, I was surprised to see media as their largest sector because media companies are typically not considered safer investments. However, after researching the companies PFLT has invested in, I found that many of them provide marketing or advertising services rather than traditional media. For instance, Adnet offers digital advertising services, and Kinetics provides tools for creating online video players with integrated advertisements. This reclassification paints a clearer picture of their investment strategy.

Financial Performance and Stability

PFLT’s financial performance has been stable, with portfolio values remaining consistent over the last four quarters. Their debt has decreased significantly from a year ago, and their net asset value (NAV) has only seen a slight decline, which is not concerning. Their net investment income has grown, explaining the recent dividend increases. One area where I would like to see improvement is in more substantial dividend growth, especially since they invest exclusively in floating rate debt, which benefits from high interest rates. While other BDCs have significantly increased their dividends, PFLT’s growth has been more modest.

Comparison with PennantPark Investment Corporation

PennantPark Floating Rate Capital is managed by the same company that manages PennantPark Investment Corporation (ticker PNNT). PNNT, founded in 2007, offers a higher yield of over 14% but has not performed as well as PFLT. PNNT has experienced several significant dividend cuts, and its share price is down 60% since its IPO. PNNT’s portfolio holds less secured investments and more second lien, subordinated debt, and equity investments, making it riskier compared to PFLT.

Summary and Final Thoughts

In summary, PennantPark Floating Rate Capital has proven to be a stable monthly dividend stock, ideal for income-focused investors. While it may not offer significant share price appreciation or consistent dividend growth, its reliable dividend yield of over 10% makes it a great choice for building a dividend reinvestment snowball. Some investors liken PFLT to a high-paying savings account due to its stable share price, but it is important to remember that it is still a stock and can be subject to market fluctuations.

Suitable Investor Profiles

PFLT is suitable for the following types of investors:

  1. Income Investors: Those who are confident they won’t need the money for a few years and want to earn a high yield.
  2. Dividend Reinvestment Enthusiasts: Investors looking to build a large monthly dividend snowball by reinvesting their dividends.
  3. High-Yield Investors: Those who prefer higher yielding stocks and plan to use the dividend proceeds to invest in other dividend stocks.

Unsuitable for Dividend Growth Investors

However, PFLT may not be ideal for traditional dividend growth investors who seek consistent dividend increases and significant share price appreciation. Despite its stable performance and high yield, the lack of significant dividend growth may not align with the goals of dividend growth investors.

Final Thoughts

PennantPark Floating Rate Capital has been a reliable choice for income-focused investors. Its stable performance, high yield, and conservative investment strategy make it a solid addition to any income-focused portfolio. While it may not offer the same growth potential as other BDCs, its consistent dividends provide a dependable income stream.

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