Capital Southwest (NASDAQ:CSWC) Corporation (NASDAQ:CSWC) reported a 24% year-over-year increase in pretax net investment income during its second quarter fiscal year 2024 earnings call, according to CEO Bowen Diehl. The company also increased its regular dividend to $0.57 per share for the quarter ending December 31, 2023, a 1.8% increase from the previous quarter, and declared a supplemental dividend of $0.06 per share for the same quarter.
Key takeaways from the call include:
- The company's portfolio grew during the quarter, with $110 million in new commitments to both new and existing portfolio companies.
- Capital Southwest successfully amended, extended, and upsized its corporate revolving credit facility and raised $22.8 million in gross equity proceeds.
- The company's total investment income reached $42.8 million, representing 6% growth quarter-over-quarter and 60% growth from a year ago.
- The company's balance sheet liquidity remained strong with approximately $207 million in cash and undrawn leverage commitments.
- The company received shareholder approval to increase the number of authorized shares from $40 million to $75 million.
- The company's regulatory leverage ended the quarter at a debt-to-equity ratio of 0.92 to 1.
- Capital Southwest anticipates being able to harvest gains in 2024, which could contribute to their earnings.
Diehl noted that deal quality and activity in the lower middle market remained strong, with loan pricing spreads remaining attractive. The company's conservative approach to balance sheet liquidity and BDC leverage was emphasized, as well as their investment strategy focused on lending and investing in the lower middle market.
The company's on-balance sheet portfolio, excluding the I-45 joint venture, consisted of 87.8% first-lien senior secured debt, 28% second-lien senior secured debt, 0.1% sub-debt, and 9.3% equity co-investments. The credit portfolio had a weighted average yield of 13.5% and weighted average leverage of 3.6 times EBITDA.
During the call, Diehl and CFO Michael Sarner discussed the restructuring of two non-accruals in the portfolio, with one expected to happen in the next couple of weeks and the other in four to six weeks. Sarner mentioned that one portfolio company may be upgraded. He also stated that the company's run rate NII is around 60-70%, and they expect to grow their UTI bucket by $0.05 per quarter, aiming for a minimum of $0.60 in the UTI bucket to support a $0.06 supplemental dividend.
The company's portfolio companies, which are mainly private equity firms, are currently in the budgeting process for 2024. Capital Southwest expects to have better knowledge of the budgets by the next shareholders' meeting in early February. The portfolio companies are experiencing low single-digit growth in EBITDA and high single-digit growth in revenue.
Capital Southwest is targeting an additional $0.20 per share in earnings for the next quarter, which they believe will support the current supplemental dividend of $0.06 per share and potentially allow for future growth.
InvestingPro Insights
In addition to the key takeaways from Capital Southwest Corporation's earnings call, InvestingPro provides further insights into the company's financial health and performance.
InvestingPro data shows a market cap of 864.54M USD and a P/E ratio of 13.04. The company's revenue growth has been remarkable, with a 59.11% increase over the last twelve months as of Q1 2024 and a quarterly revenue growth of 79.04% in Q1 2024. The dividend yield as of the end of 2023 was an impressive 20.15%.
InvestingPro Tips indicate that Capital Southwest has a history of maintaining dividend payments, with a record of 41 consecutive years. This aligns with the company's recent announcement of an increased regular dividend. Despite some concerns over poor earnings and cash flow potentially forcing dividend cuts, the company's liquid assets exceed short term obligations, suggesting a solid financial footing.
For more detailed analysis and additional tips, consider exploring InvestingPro's comprehensive suite of tools and resources. With InvestingPro, you can access a wealth of information including 7 more tips specific to Capital Southwest Corporation.
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