MAIN Street Capital: A Monthly REIT with Special Dividends

This month we doubled down on Main Stret Capital. MAIN isn’t your typical REIT. Instead, it is classified as a Business Development Company that makes investments in smaller compaines, somewhat like a private equity firm might make. MAIN’s business is best summarized in its’ profile:

The firm primarily invests in companies based in the Southern, South Central, and Southwestern regions of the United States but also considers other domestic investment opportunities. It typically invests between $2 million and $75 million in equity and $5 million to $50 million in debt, revenue between $10 million and $150 million, enterprise value between $3 million and $50 million, and EBITDA between $1 million and $20 million. The firm seeks to charge a fixed interest rate between 12 percent and 14 percent, payable in cash, in case of its mezzanine loan investments. The firm typically invests in the form of term debt with equity participation and/or direct equity investments. It prefers to maintain fully diluted minority and majority equity positions in its portfolio companies of 5 percent to 50 percent, and may have controlling interests in some instances.

Why we like MAIN

The reason we like main is simple. It pays monthly dividends, has consistently grown those dividends since 2010, and it has a high current yield at around 6% at the time of writing. Additionally, MAIN currently pays a special dividend semi-annually making owning it in June and December especially lucrative. Management is planning to wind this special dividend down over the next couple years and integrate it into its normal monthly dividends which will likely provide a boost to the stock since these special dividends aren’t always captured in reported data. This data will likely cause an increase in reported dividend growth over the next couple years which usually leads to higher prices.

Risks

MAIN isn’t without risk though. Investments in debt can cause overleverage and bankruptcy, although MAIN is likely well protected through covenants and would likely convert debt positions to equity. It is hard to tell how much MAIN would suffer in the event of a recession, which seems likely in the near future given interest rate conditions.

Valuation

We typically start with the Dividend Discount Model for our dividend growth investments:

3 Year Dividend Growth: 2.92%

Trailing 12 month Dividends: 2.88

Cost of Equity: 12%

Value = 2.88 + (1 + 2.92%) / (12% – 2.92%)

Value = 32.64

Using this model, at the current price of around $40, MAIN is about 20% overvalued. While valuation and maximizing rate of return on invested capital are important facets of investing, it is less important for dividend growth investors. Since we already had a position, we added to it for additional current income.