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Stellus Capital: Dividend Status & Outlook

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The BDC Reporter wrote the following thoughts about Stellus Capital Management’s (SCM) Dividend Outlook on Seeking Alpha, which we are re-publishing here:

We track the dividend history of 46 public BDCs. SCM has maintained the same pay-out for 23 quarters in a row, only one less quarter than the much more famous Ares Capital (ARCC).We also project the dividend outlook out twelve months from the last earnings report. In this case that’s March 2019. Where SCM is concerned we – not surprisingly – have an UNCHANGED rating for the next two dividends (this announcement brought SCM up through September 2018). The principal concern about the maintenance of the dividend of late has been that recurring income is 6 cents a quarter below the $0.34 quarterly distribution. That’s due to dilution from raising new capital and the failure – as yet – to fully deploy its capital into income generating investments. (At March 2018 SCM had $45mn in cash on its balance sheet). Will earnings catch up with the pay-out ? We think so.

Supporting our thesis is that credit quality – the key determinant to dividend maintenance – remains in very good shape after a weaker period a few years ago (re Binder & Binder). As of March 2018, we count only 3 Watch List names in our analysis out of 52 portfolio companies. There is one company on non accrual with one loan non paying and one loan current. There is 1 Worry List name – a company that’s performing but where the odds are great than a default might occur – and 1 company which is under-performing but no immediate threat. In all cases the amounts of capital and interest income at risk are modest (3% of Net Investment Income).

The Big Question for 2019: Will SCM be able to boost its dividend thanks to its decision to adopt the higher leverage allowed under the Small Business Credit Availability Act ?

We will be having a look at that issue when the IIQ 2018 results come out.

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