NEWS

MIAMI, July 05, 2023 (GLOBE NEWSWIRE) — PennantPark Floating Rate Capital Ltd. (the “Company”) (NYSE: PFLT) (TASE: PFLT) declares its monthly distribution for July 2023 of $0.1025 per share, payable on August 1, 2023 to stockholders of record as of July 17, 2023. The distribution is expected to be paid from taxable net investment income.

PennantPark Floating Rate Press Relkease – July 5, 2023

ANALYSIS

Agenda

We will review how PFLT has performed in terms of historical distribution payouts and share the BDC Best Ideas projections for the total payout expected from 2023 and 2027. We will also catch up on the latest analyst EPS projection for 2023 and 2024. Finally, we’ll briefly summarize the latest valuation data for PFLT for anybody thinking of buying or selling the stock right now.

Historical Dividend Performance

PFLT is one of those BDCs that prides itself on paying a very stable distribution to shareholders in monthly increments.

In fact, the BDC paid out the same monthly dividend of $0.0950 per share from March 2015.

As a result, the annual payout was an unchanged $1.1400 from 2015 all the way through to 2022.

Finally…

However, as interest rates climbed in 2022 PFLT was falling behind most of its peers who were increasing their payouts in some form of a mix of higher “regular” dividends and “specials”.

Starting from the IQ 2023, PFLT upped its monthly dividend to $0.1000 – a 5.3% increase after 8 years at $0.0950

This was followed just a few weeks later by an increase to $0.1025 per month, beginning in June.

This latest dividend announcement for July is unchanged for the second month in a row.

Best Ideas Projection

Back in November 2022, our sister publication – BDC Best Ideas – which seeks to project out what payout performance will look like in the future, pegged PFLT’s 2023 total distributions at $1.2000.

This was a few months before the actual increases announced by PFLT’s management.

Reasoning

Here was the rationale and the outcome:

 …Thanks to rising rates and a balance sheet leveraged almost to its target level (regulatory debt to equity was 1.3x), PFLT’s earnings are beginning to outstrip its dividend.  In the IIIQ 2022, non-GAAP Core Net Investment Income Per Share went up to $0.30, versus a distribution of $0.2850. In 2022, the analyst consensus for this metric has moved up slightly to $1.2200.  This is no great surprise given the most recent result and the higher rates on the way. We wouldn’t be surprised to see EPS go even higher than what the analysts are calling for – if only for a time.

A Cent Or Two

The likely result will be that management might boost the payout in 2023 and beyond. We’d been assuming $1.1400 a year, as before. Now, we’re projecting $1.2000 – all the way through 2027. Any higher EPS in the first year or two will probably be retained and be available to maintain the payout as profits drop with interest rates and credit losses. On the latest net book value per share, that’s a return on equity of 9.8% – better than before but far behind many of PFLT’s peers.

BDC Best Ideas- November 17, 2022

Analyst Projections

As noted above, back in November of last year, the 7 analysts covering this stock were projected FY 2023 EPS of $1.2200.

Currently, expectations have increased to $1.3400, with half the fiscal year in the rearview mirror.

However, in Fiscal 2024 – which ends in September of next year – the analysts are predicting a modest drop in the EPS to $1.2800.

In almost every case across the BDC sector, analysts are projecting lower earnings in 2024 – whether calendar or fiscal – than in 2023.

Of course, the underlying assumption is that the Federal Reserve will start cutting rates and pressuring BDC earnings.

Bullish

BDC Best Ideas does not flatly disagree but there is an argument to be made – and which grows more persuasive by the day – that calendar 2024 will see the highest average yield for leveraged lending.

As a result, we wouldn’t be surprised to see FY 2024’s EPS match FY 2023’s $1.3400.

At $1.34, PFLT’s earnings would be covering the annualized monthly distribution by 109%.

Longer Term

The positive outlook for short-term earnings is a positive factor that supports BDC Best Ideas’ longer-term projection of the annual dividend continuing unchanged at its current level through 2027.

PFLT is likely to preserve some of the earnings to support its $0.1025 monthly distribution over the long term.

BDC Best Ideas will be slightly nudging up its projections for 2023-2027 accordingly.

The 2023 dividend estimate will increase from $1.2000 to $1.2075 – barely different – and 2024-2027 will rise to $1.2300 from $1.2000 – a 2.5% increase.

Are We There Yet?

Could those numbers go even higher?

It’s possible for 2023 and 2024, but not for the latter years and any increase is likely to be modest.

Or, in other words, PFLT appears to be approaching peak earnings and payouts.

Valuation

As this chart shows, PFLT has underperformed on a stock price basis over the past 5 years compared to BIZD – the BDC exchange-traded fund.

In fact, Seeking Alpha data shows PFLT’s stock price has dropped (22%) over the half-decade but thanks to its distributions boasts a 37% total return – a just okay 7.4% per annum.

Not Great

In the shorter-term – YTD 2023 – PFLT has also underperformed by comparison to BIZD on a price basis, as this next chart shows:

BIZD is 7% in the black and PFLT has dropped a few percentage points since the end of 2022.

Metrics

At its opening price of $10.67 on July 7, 2023, PFLT was yielding 11.5% on a price basis and 11.0% on a net book value basis.

That’s below the 12.7% average BDC yield calculated by BDC Best Ideas.

The FY 2023 Price to Earnings ratio is 8.0x, slightly higher than the BDC average of 7.5x.

PFLT is trading (19%) below its 52-week high and (27%) below its all-time high, but 13% above its 52 week low.

VIEWS

Respect

BDC investors undoubtedly appreciate the stability of PFLT’s distributions, which is reflected in how the BDC trades at a premium to net book value – a performance that only a quarter of BDCs can claim.

That premium also allowed PFLT to recently raise additional equity in January.

Left Behind

However, there’s no doubt that investors have benefited only modestly from the huge increase in interest rates that has swept the BDC industry since early 2022.

The regular distribution payout has increased by only 7.9% and none was forthcoming in the first year.

As a result, the stock has underperformed its peers.

We don’t expect PFLT’s earnings or dividend to change much going forward so any improvement in the BDC’s relative price performance may tell us more about the outlook for its peers.