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Wednesday, September 11, 2013

Recent Buy: PNNT

Sep 10, 2013: Bought 215 shares of PNNT at $11.63 per share.

PennantPark Investment Corp. (PNNT), incorporated in January 2007 in Maryland, is a business development company focused on generating current income and capital appreciation through debt and equity investments. PNNT invests primarily in middle-market companies in the United States, through senior secured loans, mezzanine debt, and equity investments. 

PNNT is a Dividend Challenger with a 6-year streak of dividend increases. It pays quarterly dividends of $0.28 per share in January, April, July and October. Initial Yield on Cost is 9.63%.

My Graham Number fair value estimate for PNNT is $17.88. Zacks Investment Research has a target price of $12.50. Compared with the average of $15.19, PNNT is discounted by about 35%.

The following table provides some key statistics for PNNT.
The sum of PNNT's dividend yield and its 5-yr dividend growth rate is 35.11%, well above the 12% required by the Chowder Dividend Rule. Additionally, PNNT passes the following of my selection criteria:
  • Debt to Equity ratio is 48% (below 50%)
  • 7-year weighted average dividend growth rate is 20.33% (at least 7%)
  • Forward P/E ratio is 10.13 and the trailing twelve month (TTM) P/E ratio is 8.29 (below 16)
  • Estimated 5-yr total payback percentage is 61.89.% (at least 16%)

PNNT pays out much more than 65% of its earnings in dividends (82.35%), to be expected as PNNT is a BDC. 

PNNT is a 6-star stock: (*******)

Other ratings for PNNT

 Zacks Rating  3 Hold
 The Motley Fool 's CAPS Rating  (*****)

Concluding Remarks

PNNT appears at the top of my September dashboard of dividend growth candidates. 

As a business development company (BDC), PNNT specializes in investing in private companies, much like venture capitalists do. In return, PNNT takes an ownership stake and so shares in the profit of its client companies. BDCs do not pay corporate taxes on earnings and are required to distribute 90% of taxable income to shareholders. As such, PNNT offers a very attractive distribution yielding nearly 10%!

While BDCs tend to offer high yields, they can be quite sensitive to prevailing economic conditions. In tough times, BDCs will often decrease their distributions until conditions improve. Looking back at PNNT's distribution history, its a worthy exception. During the 2008 recession and subsequent recovery, PNNT continued to increase its distribution. 
Reviewing PNNT's latest results and its recent distribution history, I note some concerns. Although PNNT's reported earnings matched analyst expectations, it represents a decrease of 3.57% from the year-ago quarter. Looking forward, the average earnings expectation has moved down from $1.11 per share, to $1.04 per share. 
PNNT has maintained a distribution of $0.28 per quarter for seven straight quarters. Recently, it declared a distribution of $0.28 per share, payable on October 1, 2013, to stockholders of record on September 20, 2013. This declaration means PNNT has not increased its distribution for two consecutive years. It probably will be dropped from Dave Fish's list of Dividend Champions
Despite my concerns, I think PNNT is a good investment for DivGro considering its attractive yield. In my opinion, the high yield affords a little more risk. And PNNT has shown confidence that it would be able to maintain, rather than have to reduce, its distributions. 
215 shares of PNNT represent $240.80 of expected annual dividend income, which increases DivGro's forward 12-month projected dividend income to $1,763.75

PNNT is the 15th dividend stock purchase for DivGro.

Full Disclosure: Long PNNT

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