Capital Southwest Corp. (CSWC) is a business development company (BDC) that makes loans to small- to medium-sized businesses; it’s a bet on a continuing economic rebound, notes Sean Brodrick, editor of Wealth Megatrends — and a participant at the MoneyShow Last Vegas, Sept. 12-14. Learn more here.
The company has a $586 million market cap, giving it plenty of room to grow. And while it’s forecast to see earnings dip a bit this year, red-hot economic growth will push more money into the coffers of this BDC, not less.
Just look at its most recent quarterly report, made Aug. 3, where CEO Bowen Diehl dished up some good news:
• The company’s investment portfolio grew by 16% to $799 million.
• Capital Southwest has equity investments in 31 companies, or 57% of the companies in its loan portfolio. Diehl said his team was “very excited” about this equity portfolio going forward.
• The company sold some positions and realized an internal rate of return (IRR) of 34% on those sales. Nice!
I also like how Capital Southwest’s loan portfolio is diversified, giving it broad exposure to economic growth.
To make this story more interesting, Capital Southwest sports a dividend yield recently at 6.4%, and it’s raised its dividend three times in the past year, including its most recent quarterly report in August.
Looking ahead, Capital Southwest is expected to raise its dividend payout about 2% per year for the next three years. And it also pays a special dividend of 10 cents a share pretty regularly.
If there are any flies in the ointment, the company issues shares now and then to raise cash to make more loans. But it’s keeping a lid on share issuance, and it just did a cash raise recently.
And sure, Capital Southwest’s returns could be impacted if this next stage of the pandemic impacts economic growth more than I expect. That’s okay — you’ll be paid a fat and growing dividend to wait.
Technically. this stock has zigzagged higher since last year’s crash. Bullish volume is higher than bearish volume, which is a positive indicator. And one of my favorite indicators, the Force Index, is also bullish.
It has all of that going for it and more. By that, I mean it’s on sale! Capital Southwest’s share price has consolidated sideways since June. It’s just digesting big gains. It should break out again, and I expect another big rally.
