Main Street Capital: A First Look at Its Third-Quarter Earnings

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Small business lender and investor Main Street Capital (NYSE: MAIN) reported third-quarter earnings after market close on Wednesday. Its earnings easily covered dividends this quarter, and the value of its portfolio increased compared to the prior quarter.

Here are two things that should be top of mind for every Main Street Capital investor.

1. Dividend coverage

Main Street Capital reported net investment income of $0.58 per share this quarter, easily outpacing its regular dividends of $0.54 per share.

Investors typically use net investment income as a barometer for a BDC's earnings power. Net investment income exceeded dividends by about $0.04 per share this quarter, a good sign to see.

Source: SEC Filings.

Dividend income that Main Street Capital earned from its portfolio companies fueled the increase in net investment income, increasing by $2.8 million (about $0.06 per share) from the year-ago period. The company said that $1.7 million (about $0.03 per share) of the increase in dividend income was "considered to be less consistent...or non-recurring."

I've said it before, but it's important: Because Main Street Capital's portfolio is more heavily invested in equity than the average BDC, it relies on dividends from its investments to pay dividends to its own shareholders. Rising dividend income is good, but it should be balanced with the fact that dividend income is inherently less predictable or stable than interest income.

2. Trends in book value

Book value, also known as net asset value, increased to $21.62 per share, up from $21.11 per share last quarter.

There were three factors at play here. First, Main Street Capital earned $0.04 per share in net investment income in excess of dividends paid this quarter. This is perhaps the easiest to explain: Any amounts not paid out as dividends obviously add to book value.

Secondly, the value of its portfolio increased by about $0.24 per share. Main Street Capital sold a portfolio company for more than its mark right at the end of the third quarter. In addition, loan prices broadly increased this quarter, as senior loans returned about 3%.

Finally, Main Street Capital issued more shares during the quarter. Because the company's stock trades above book value, stock issuance increases book value on a per-share basis. This accounted for about $0.23 of the per-share increase.All in all, about 55% of the increase came from operations, and about 45% came from stock issuance.

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