Gladstone Investment (GAIN) fell sharply after reporting a decline in Net Investment Income (the number on which dividends are based) to a level below the distribution, reports Adrian Day, international expert and editor of Global Analyst.
But it wasn’t as bad as the headline number suggested. The net investment income decline was amplified by timing on various items. It exited one investment just before the quarter, so did not receive income on that loan during the quarter. And it sold another relatively large investment just after quarter end, meaning the significant realized gain was not recorded in the quarter either.
Two other factors are technical accounting issues. One investment was placed on non-accrual, which increased the expense line since previously accrued interest had to be reversed as a bad debt.
Lastly, an incentive fee is paid to the advisor if the realized gains exceed both realized and unrealized losses. But under GAAP, the fee must be accrued as if all investments were liquidated (i.e., the accrual includes unrealized appreciation, on which Gladstone does not pay a fee).
Gladstone management stated that the underlying portfolio is very strong. The NAV increased, from $11.57 to $12.30 per share), and, signaling confidence, the regular distribution rate was increased from 80 cents to 82 cents. In addition, Gladstone pays semi-annual supplemental distributions largely on realized gains.
Recently, each supplemental has been the equivalent of an additional monthly dividend. The company emphasized that the adjusted NII exceeds all distributions “by a significant margin”. This confidence was also emphasized with strong inside buying after the quarter results were announced.
Recently, the company has issued a new series of preferred stock which allowed it (with some borrowing on its credit line) to redeem two earlier preferred series, resulting in overall lower rates on its debt. Its loans are now 97% variable rate, meaning it is insulated against rising interest rates.
With a yield on the monthly dividend of over 8% (about 9.3% including the supplementals), and trading at an almost 20% discount to NAV, Gladstone is good value for income and growth. Under $10, it is a good buy, but in this current volatile market, we may see it 10 or 20 cents cheaper at some point.
