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Bryan Perry Points to High Yield at PennantPark
01/30/2020 5:00 am EST
As the U.S. economy picks up speed in 2020, raising our exposure to lenders to small to medium-sized businesses is a go-to theme, notes Bryan Perry, income expert and editor of Cash Machine.
We are adding PennantPark Investment Corp. (PNNT) to our high-yield portfolio; it is a well-positioned business development company (BDC) that is building a strong loan portfolio in businesses levered to a stronger domestic economy.
The fund typically invests in building and real estate, hotels and gaming, electronics, health care, education and childcare, financial services, printing and publishing, consumer products, business services, energy and utilities, distribution, oil and gas, media, environmental services, aerospace and defense, manufacturing industries and retail.
It invests in equity securities and debt transactions through preferred stock, common stock, warrants, options, subordinated loans, mezzanine loans and senior secured loans. Think of them as a bank with skin in the game.
PNNT is seeing improved dividend coverage that will be above 1X in 2020. The current dividend payout is $0.72 per share, translating to a current yield of 10.96%. The stock trades at 0.76 of book value to give a very attractive discount.
The average weighted yield on the loan portfolio consisting of 53 companies is 11.2%, making the current 10.96% premium distribution yield an excellent entry point from my perspective.
The current portfolio totaled $1,13 billion and consisted of $531.4 million of first lien secured debt, $391.1 million of second lien secured debt, $48.1 million of subordinated debt and $161.5 million of preferred and common equity.
The debt portfolio consisted of 90% variable-rate investments and 10% fixed-rate investments. There are currently no portfolio companies on non-accrual.
Shares of PNNT have rallied off a three-year low to $6.60 per share where I view the stock as a buying opportunity. Let’s put this high-yielder to work in a market where high-yield financials are coming rapidly back in fashion.
PennantPark Investment is a Regulated Investment Corporation — and is structured to pay out 90% of its net income in the form of dividends taxed as ordinary income for tax purposes. Structured like a REIT but with certain caveats, BDCs can use leverage, participate in ownership stakes and use derivatives to hedge risk.
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