Is Main Street Capital Stock a Buy, Sell, or Hold With Shares 15% Below Their 52-Week High?

Main Street Capital (NYSE: MAIN) is a business development company (BDC). It has to distribute at least 90% of its taxable earnings to shareholders to avoid corporate-level taxation, much like a real estate investment trust. Like other BDCs, it tends to have a very attractive yield. But Main Street Capital is a fairly conservative business, which changes the equation greatly for dividend investors. Here's why the roughly 15% pullback from the stock's 52-week high, as of this writing, could make it a buy for conservative investors.

What does Main Street Capital do?

To keep things simple, BDCs like Main Street Capital sell stock and issue debt, using the proceeds to make loans to smaller companies. Generally speaking, the companies to which BDCs provide loans don't have more attractive options, such as issuing stock or debt on public markets. And bank loans are either not available or would come with too high an interest rate. This allows Main Street Capital to charge very high interest rates for its loans.

Missed Nvidia in 2009? This Rare Signal Is Flashing Again. In 2009, a "Double Down" signal flashed for a little-known chipmaker called Nvidia. For the first time in years, that same "Total Conviction" signal is flashing for a company 1/100th the size of Nvidia. Continue »

That said, Main Street Capital tends to be very conservative. It prefers to make loans higher up in the capital structure so that, in a worst-case scenario, it gets paid first. Moreover, Main Street Capital tends to demand equity stakes in the businesses it lends to, providing additional upside when companies perform well. It is a generally well-run BDC, but the clearest sign of the company's conservatism is its dividend.

Main Street Capital's core dividend backs the current 5.6% dividend yield. The core dividend has been increased regularly, though not annually, since the BDC's initial public offering. The core dividend has never been reduced, and in the second quarter, the $0.78 per share in dividends paid was handily covered by the company's $0.97 per share in net investment income and $1.04 per share in distributable income. There is plenty of room for adversity before the core dividend would be at risk of a cut, so if you own it, it is probably worth holding on to. But with Main Street Capital's price-to-book ratio roughly in line with its five-year average, the stock looks fairly priced right now after its recent drawdown, so it might be worth buying if you don't own it.

The supplemental dividend is icing on the cake