Gladstone Investment Corporation (GAIN) is a business development company (BDC) that pays monthly distributions, notes Ben Reynolds, editor of the Sure Retirement Newsletter.
Gladstone is a small cap stock with a market cap of just $275 million. The company has investments in 36 businesses across 19 states and 17 industries in the United States.
GAIN invests in small businesses with $3 million to $10 million in EBITDA. The company’s investment portfolio is comprised of 72% debt investments and 28% equity investments. In contrast, most BDCs have around 90% of their investments in debt securities.
Gladstone recently was a partner in the buyout of J.R. Hobbs Co., a transaction in which Gladstone provided equity and senior secured debt. Deals like this are common for Gladstone and a major component of the BDC’s growth runway.
Gladstone’s dependable debt income allows it to pay steadily rising dividends. Its equity investments provide capital appreciation potential. It has a conservative payout ratio of 56%. The company’s interest income comfortably covers its monthly distributions.
Moreover, around 90% of the company’s debt portfolio has variable rates which will protect against potential rising interest rates. The company prioritizes its distributions. Management has cut its incentive fees in the past to secure distribution payments to shareholders.
The Gladstone team focuses heavily on valuation when making new equity investments. Management will remain diligent in searching out value-oriented deals. Gladstone managed to grow at a double-digit pace over the last several years, and will likely continue to do so.
Gladstone currently has a dividend yield of 8.3%. The company’s historical median yield is 8.5%. Gladstone has an unusually high yield for a business with a payout ratio of just 56%.
The company appears significantly undervalued based on its investment income rather than its dividend history. If Gladstone continues to perform well, its yield should decline as its valuation and stock price rise.
