A poster on this board has repeatedly complained about the dilution from MAIN's secondaries. I'd like to present some concrete evidence that this poster is completely incorrect.
Let's look at MAIN's secondaries beginning in 2011.
Mar. '11 -- 4,025,000 sh.
Oct. '11 -- 3,450,000 sh.
June '12 -- 4,312,500 sh.
Dec. '12 -- 2,875,000 sh.
Aug. '13 -- 4,600,000 sh.
Apr. ' 14 -- 4,600,000 sh.
Total new shares added via these 6 secondaries = 23,862,500 sh.
MAIN's total share count since January 1st, 2011 has increased by +136%.
This poster has complained that the dilution from these offerings would lower earnings per share and put the dividend coverage in jeopardy. If this is true, we should see lower NII over this time period, because MAIN has more than doubled the share count.
Now let's see what happened to NII per share.
At the end of Q410 NII was $0.34 per share.
At the end of Q413 NII was $0.57 per share.
NII per share didn't decline, it has increased by over +67%
Because NII per share has increased by over 67% over this time period, MAIN has raised the divvy 8 times, totaling a 32% increase in the dividend. Plus, in Q413 MAIN over-earned their dividend payout by over 15%.
Now let's look at NAV. Because MAIN is able to complete secondaries at significant premiums to NAV, each secondary is highly accretive to NAV.
MAIN's NAV on January 1,2011 was $13.90. Those 6, highly accretive secondaries were a major reason MAIN's NAV was $19.89 at the end of Q413, for a 43% increase. For example, the most recent secondary will add about $0.95 to NAV.
When a BDC like MAIN can raise capital at about a 6% cost of new equity, and their average weighted yield on their investments is about 11.8%, this is highly accretive for existing shareholders.
Rather than complain about these secondaries, realize these highly accretive secondaries are a big reason MAIN has been able to raise the divvy 8 times over the last 3 years, not to mention the 63% increase in share price.
As an income investor, I'm more interested in dividend amounts than price appreciation. When a company can issue shares at a 6% to 6.5% cost of funds and make 12% in investments off of the new shares, that is going to help dividend increases going forward. Most BDCs can't even come close to that difference, and those BDCs with SPOs which have 10% to 13% dividend yields are going to have a hard time with accretive investments off of those SPOs, especially those which are externally managed (higher overall management fees). Thankfully, MAIN is in the driver's seat among BDCs when issuing SPOs.
There is a Seeking Alpha article on MAIN's recent secondary.
The title of the article is: "Main Street Capital Makes a Move"
The author sees this secondary as beneficial to existing shareholders, and so do I.
Here are a few excerpts from the article:
"...This offering was needed for growth capital and is accretive to shareholders...."
"...The current offering is for 4 million shares plus the underwriters option to purchase up to 600,000 additional shares of common stock at the public offering price, less the underwriting discount. Net proceeds after deducting the underwriting discount and estimated offering expenses would be around $140 million.... This equates to net proceeds of $30.35 per share compared to its NAV of $19.89. The end results will be an increase in equity capital of 18% while only increasing the amount of shares by 12% and NAV per share growth of 5% to shareholders. ..."
"...Clearly this offering has benefited shareholders in many ways and BDCs that are still trading at a premium to NAV will continue to have a competitive advantage over the others. ..."
This is pretty elementary. Highly accretive secondaries like this are good for existing shareholders.
If this link to the article doesn't work, the article should be on the MAIN Yahoo page under "Headlines"
thanks for the oratory, lol. pure and simple, SO's dilute a shareholder's percentage. Period. That is why in both recent instances PPS dropped significantly while volume soared. What you have failed to take into account is what share price would have been had not SO's occurred. MAIN has/had performed well prior to last SO (and the previous). The share price would have been even higher had not the PPS had to recover from the hit it took due to the SO.
Really, go visit the Wikopedia stock site and you will understand. Actually, all you need to do is look at PPS performance when SO's were announced.
Why do you think there was a huge sell-off? Investors sold off (including institutional investors) because they thought the NAV would increase? Come on...
As I stated previously, I waited until the news had circulated on the SO, waited until most of the sell off was completed, and bought in again at $31.46. That last buy has taken MAIN to 13.23% my stock portfolio. No one wants to see MAIN perform well better than me. 12% is typically the ceiling I will work with for any one investment. I will wait until PPS has fully recovered and then sell down until MAIN is again at 12% max my portfolio. Using FIFO I won't get hit with short term capital gains tax as I have held MAIN for close to 6 years now.
Good luck to rc. I wish you, me, and all MAIN investors well. Just understand that the metrics you may use to drive your decisions are not universal and not the ones I use. Bottom line is I outperform the overall DJI and Nasdaq avgs. The checks I am writing out this week to the IRS and NY state for capital gains, and dividends, attest to that.
Pure and simple, SO's at a premium to BV do not dilute existing shareholders, since by definition BV is accreted by such offering.
What happens to the share price is an independent variable and not susceptible of description by the use of the term "dilution". If that made sense every market move down in share price would be a
dilution, for whatever reason, rather than merely a drop in share price, which is what it is.
Accretive to BV makes sense, accretive to earnings makes sense, accretive to share price makes nonsense. PPS performance has nothing to do with it whether the offering was accretive or dilutive, but it could have had something to do with investor perception of same (another story).
A comment like "SO's dilute a shareholder's percentage. Period." makes no sense. Percentage of what? What kind of SO? At what price? It's garbage generalization.
There ya go.
If all those secondaries hadn't occurred, at best, MAIN's PPS and dividend would still been around where they were in January 2011.
What you are failing to realize is that BDC's pay out essentially all of their taxable earnings to shareholders, and are restricted in their use of leverage. The only way they can grow is to issue new equity.
Think about it. If MAIN hadn't done those secondaries, sure they could have reinvested their capital as loans paid off, but NII wouldn't increase because they'd just be replacing the income they lost from the loan that prepaid. And if they couldn't replace the old loan with a new loan of similar yield, NII would be less. That's what's been happening over the last two years for all BDC's to varying degrees.
Because MAIN is able to issue new equity at such a high premium to NAV, and modest cost of funds relative the weighted average yield of their portfolio, existing shareholders greatly benefit from their secondaries. This is why NII & NAV have increased along with those 6 secondaries.
Yes, those new shares are due MAIN's roughly 6.3% dividend. But, on average, MAIN lends out that new capital at 11.8%. Everything over and above the cost of that dividend and expenses to run the company, increase NII per share for all shareholders. Not to mention MAIN then is able to modestly leverage that new equity to further increase NII per share to all shareholders.
The reason MAIN's share price has grown, the reason the dividend has increased 8 times since 2011, is because of those secondaries. They have allowed MAIN to increase EPS.
You ask me why was there a sell off on the secondary. They are selling 4mm shares in one day, about 15x greater than their daily average.
Let me turn that question around. Why, in spite of all those secondary offerings, has MAIN done so well if these secondaries are bad for existing shareholders?
Glad to hear your little brags about how successful you are.