
Richard Drury
Most important Avenue Capital (MAIN) and CION Funding Company (CION) are each high-yielding Enterprise Growth Corporations (BIZD). MAIN, with its spectacular monitor report of crushing each the broader BDC sector in addition to the S&P 500 (SPY) over the long run, is a number one blue-chip BDC:
In the meantime, CION, a comparatively newer entrant to the publicly traded BDC house, has been making strides with its strategic investments and robust dividend yield. Furthermore, with its steep low cost to NAV and well-covered double-digit dividend yield, it seems as if it’d supply compelling upside potential to buyers at present costs.
On this article, we’ll evaluate these two BDCs side-by-side and supply our tackle which is a Sturdy Purchase proper now.
MAIN Inventory Vs. CION Inventory: Quarterly Outcomes
MAIN reported spectacular Q3 outcomes, together with a big enhance in its internet asset worth per share by $0.64 (2.3% sequentially), primarily attributed to unrealized features and retained earnings. Its core earnings per share noticed a sequential development of three.8% and a notable 15.4% year-over-year enhance. Final, however not least, the weighted common efficient yield of MAIN’s portfolio was fairly excessive at 12.8%.
CION’s third-quarter outcomes had been additionally fairly robust, with internet funding revenue of $0.55 per share and earnings per share reaching $0.87, offering important protection for the dividend and serving to to spice up NAV per share, which elevated by $0.49 (3.2%) in comparison with the earlier quarter. Furthermore, administration continued to purchase again inventory at a steep low cost to NAV, creating substantial worth for shareholders.
MAIN Inventory Vs. CION Inventory: Stability Sheets
MAIN’s funding grade credit standing is evidenced by its pretty low leverage ratio of 43.31%. Furthermore, it has loads of liquidity with $420 million, signifying a stable monetary place in opposition to an enterprise worth of $5.2 billion. Its capital construction is well-balanced with a mixture of secured, floating-rate revolving debt, and unsecured, fixed-rate long-term debt.
CION, in the meantime, has a better – although nonetheless cheap – leverage ratio of 1.03x, whereas it additionally has loads of liquidity and a reasonably well-laddered debt maturity ladder, particularly after not too long ago refinancing a considerable quantity of its debt.
Total, we give MAIN the sting right here given its investment-grade credit standing and decrease leverage ratio.
MAIN Inventory Vs. CION Inventory: Enterprise Fashions
MAIN’s funding technique is diversified throughout its Decrease Center Market, Personal Mortgage, and Center Market segments. They focus totally on secured debt investments and complement these investments with fairness development investments. This strategy has served MAIN very effectively over the long run, enabling them to generate engaging returns for shareholders and – because of this – commerce at a big premium to NAV. MAIN prudently takes benefit of this by commonly issuing new inventory, thereby rising its NAV per share which – in flip – allows it to develop its dividend persistently as effectively. This fuels a virtuous cycle that has delivered phenomenal long-term outperformance for shareholders.
CION’s funding portfolio, in the meantime, is diversified throughout 109 corporations in 24 industries and is primarily centered (87.8% of its funding portfolio) on senior secured loans, together with 85.7% in first-lien investments. With its non-accruals sitting at simply 1% on a good worth foundation, CION’s funding portfolio seems to be working at a really excessive stage proper now. MAIN’s non-accruals additionally sit at ~1% on a good worth foundation, indicating that its underwriting efficiency is equally robust, if not stronger, provided that solely 68.8% of its portfolio is invested in senior secured debt.
CION’s capital allocation technique is a bit completely different from MAIN’s provided that its inventory trades at a steep low cost to NAV moderately than a steep premium. In consequence, as an alternative of issuing shares to drive NAV per share accretion, CION is repurchasing shares at a steep low cost, driving NAV per share accretion within the course of.
It is usually essential to notice that – whereas MAIN has a nine-year dividend development streak – CION has been extra conservative with rising its personal quarterly dividend, although each have been paying out particular dividends to keep up compliance with BDC rules that they need to pay out 90%+ of taxable revenue within the wake of rising internet funding revenue on account of rising rates of interest.
A last consideration to bear in mind is that MAIN is internally managed whereas CION is externally managed. In consequence, MAIN’s expense ratio is way decrease than CION’s (2.63% vs. 7.35% on a non-leveraged foundation, in accordance with cefdata.com).
Total, we predict that MAIN’s enterprise mannequin is superior to CION’s throughout a full enterprise cycle. Nonetheless, provided that we consider that now’s a prudent time to be extra defensive and value-oriented, moderately than aggressive and growth-oriented, we predict that CION’s enterprise mannequin – with its better deal with senior-secured debt investments in comparison with MAIN and its emphasis on shopping for again inventory as an alternative of issuing inventory – is in a extra favorable place, MAIN’s decrease expense ratio however.
MAIN Inventory Vs. CION Inventory: Dividend Evaluation
Each corporations presently get pleasure from robust dividend protection ratios. MAIN has had such robust dividend protection that it has paid particular dividends for 9 quarters in a row whereas additionally rising its common month-to-month dividend at a wholesome clip (rising it 5 occasions out of the previous six quarters). In truth, within the third quarter, MAIN’s distributable internet funding revenue exceeded its common month-to-month dividends by a whopping 51%. Transferring ahead, analysts count on its dividend to proceed rising at a
Clearly, MAIN’s base dividend may be very protected and it seems extremely seemingly that it’s going to proceed to ship engaging supplemental dividends to shareholders for the foreseeable future. Furthermore, analysts presently forecast its dividend to develop at a 9.2% CAGR by 2025, making it an distinctive dividend development inventory.
CION, in the meantime, additionally enjoys robust dividend protection, with its internet funding revenue exceeding its common quarterly dividend by an much more spectacular 62% throughout the third quarter. This gave administration loads of flexibility to spend money on new loans, pay out substantial particular dividends, and purchase again shares. Administration additionally talked about on its newest earnings name that they could enhance the tempo of their share buyback program within the coming quarters.
That being mentioned, regardless of their exceptionally robust dividend protection ratio, administration mentioned it plans to maintain its common quarterly dividend regular “for now.” Whereas it’s unsure why that is the case precisely, it seems that administration needs to keep up most monetary flexibility transferring ahead because it continues to try to diversify and develop its funding portfolio and purchase again inventory in an try to shut its steep hole to NAV per share. Nonetheless, some development within the common quarterly dividend and/or a serious acceleration of the buyback would go a good distance towards signaling administration’s confidence within the inventory and sure result in a big upside within the inventory worth.
MAIN Inventory Vs. CION Inventory: Valuations
On the subject of valuation, CION is the clear winner. MAIN trades at a whopping 1.54x premium to its NAV – which is roughly in-line with its five-year common of 1.58x – and likewise trades at a decrease NTM dividend yield (6.56%) than its five-year common (7.09%). That being mentioned, its P/E ratio of 11.10x is meaningfully decrease than its five-year common of 14.37x, however that is seemingly solely momentary as a result of elevated state of short-term rates of interest.
CION, in the meantime, trades at a steep low cost to its NAV (0.71x), affords a really engaging dividend yield that’s almost double MAIN’s (12.63%), and likewise trades at a really low-cost P/E ratio of simply 6.76x. Each its dividend yield and its P/E ratio are at clear reductions to its historic averages, whereas its P/NAV low cost is roughly in keeping with its historic common. With CION, you might be getting greater than twice the ebook worth for each greenback spent than you might be with MAIN and almost twice as a lot dividend revenue.
MAIN Inventory Vs. CION Inventory: Threat Evaluation
Each MAIN and CION are positioned to thrive in an atmosphere the place the financial system avoids any form of significant downturn and rates of interest stay considerably elevated. In consequence, if the U.S. financial system can navigate a smooth touchdown, the Federal Reserve could possibly solely slowly minimize rates of interest whereas non-accruals and defaults on MAIN’s and CION’s investments will seemingly not spike a lot in any respect both.
Nonetheless, if the financial system does go into recession and the Fed is compelled to slash rates of interest aggressively, this may very well be a really dangerous state of affairs for MAIN and CION, because the recession will seemingly result in a pointy uptick in non-accruals and probably even defaults of their respective funding portfolios whereas their internet funding revenue will even seemingly endure a blow provided that they each have important publicity to floating price loans, which can see their charges drop.
One other threat to remember that is exclusive to CION is the truth that it has an unusually excessive proportion of its loans invested in PIK (payment-in-kind) loans. Whereas the corporate explains in its annual report that it constructions a lot of its loans this fashion on objective to earn increased returns and to raised assist distinctive circumstances and constructions for its debtors, these loans are inherently riskier. In consequence, CION may see a better uptick in non-accruals than a lot of its friends throughout an financial downturn. That being mentioned, the senior secured structuring of the overwhelming majority of its loans and the deep low cost to NAV greater than compensate for this threat issue.
MAIN Inventory Vs. CION Inventory: Investor Takeaway
MAIN is clearly an exceptional BDC, and there’s a robust case to be made that it’s the greatest publicly traded BDC there may be. Nonetheless, worth is what you pay and worth is what you get. Subsequently, whereas MAIN is actually beneficial and positively deserves to commerce at a premium to NAV, given the present macroeconomic atmosphere the place short-term rates of interest are prone to fall within the close to future and we face an actual threat of falling into recession, we don’t suppose that it deserves to commerce at almost the premium it presently enjoys.
In the meantime, CION solely has a brief monitor report as a publicly traded BDC and doesn’t have almost the status, low expense ratio, or dividend development outlook that MAIN enjoys. Nonetheless, its underwriting efficiency has been robust, its stability sheet is in fantastic form, its funding portfolio is conservatively positioned, and its valuation is extraordinarily low-cost. Whereas CION might should commerce at a reduction to NAV given its increased expense ratio and less-proven monitor report, we predict its present low cost is way too steep and its dividend yield – which seems fairly protected in the meanwhile – seems to be extraordinarily engaging.
In consequence, we price MAIN a Maintain and CION a Sturdy Purchase.